MontneyInitiation 04-16-14 GMP RPT

Oil & Gas
Prepared by GMP Securities L.P. Please see important disclosures on the last page of this report.
Aaron Swanson, CFA Jordan McNiven (403) 543-3563 (403) 695-1401 aswanson@gmpsecurities.com jmcniven@gmpsecurities.com Jason Konzuk, CA, CFA Gabriel Chow (403) 543-3587 (403) 543-3035
April 16, 2014

rjkonzuk@gmpsecurities.com gchow@gmpsecurities.com
April 16, 2014
A Montney Cre
Report synopsis: The Montney gas resource play, which expands across northwestern Alberta into northeastern B.C., continues to see an increase in drilling activity, an improvement in type curves and a resulting step change in economics. Within this report, we look at five small to mid-cap Montney producers with the assets, upside and valuations, which justify our bullish stance on this play. Why Montney matters Horizontal wells in the Montney continue to dominate gas targeted drilling in Western Canada. Completions continue to improve resulting in a step change in well economics. Advantage Oil & Gas (BUY, $8.00 TP) Upper and lower Montney provide an inventory of low risk development while the middle Montney has the potential to double inventory. Three-year development plan should grow production at a 21% CAGR. Delphi Energy (BUY, $4.25 TP) Some of the most economic Montney gas wells in Western Canada. Debt levels have peaked, the company is undergoing significant transformation. Donnycreek Energy (BUY, $3.00 TP) Small cap, cheap way to play the Montney at Kakwa in Alberta. Expanding resource upside with Upper Montney wells. Painted Pony Petroleum (BUY, $14.75 TP) 7 TCFe of discovered gas in place across northeastern B.C. acreage. Well positioned to be either an LNG supplier or take-out candidate. Storm Resources (BUY, $6.75 TP) Top tier management team leads 4th iteration. Company is entering significant growth phase and looking to further consolidate the Umbach area of northeast B.C.
Launching coverage on 5 Montney producers
B.C.
Alberta
Storm Umbach
Painted Pony Blair/Townsend/Cypress Advantage Glacier
Donnycreek Kakwa/Wapiti
Delphi Bigstone
2015E Valuation 2015E Production Company Advantage Oil & Gas Delphi Energy Donnycreek Energy Painted Pony Petroleum Storm Resources (boe/d) (% Gas) 27,134 97% 12,116 69% 3,726 48% 18,363 85% 8,526 80% Risked NAV ($/sh) (P/NAV) $8.51 0.7x $6.53 0.5x $4.37 0.5x $17.65 0.6x $8.42 0.6x EV/DACF EV/Prod'n Total D/CF (x) 6.9x 7.1x 3.1x 9.9x 10.3x ($/boe/d) $52,123 $53,885 $37,988 $72,671 $79,754 (x) 1.7x 1.6x 0.5x 1.9x 1.1x
Source: Company reports, geoSCOUT, GMP
April 16, 2014
TABLE OF CONTENTS
Why the Montney matters Whats driving the activity? Adding five names to our Montney portfolio How they stack up Advantage Oil & Gas Ltd. Delphi Energy Corp. Donnycreek Energy Inc. Painted Pony Petroleum Ltd. Storm Resources Ltd. 4 7 9 13 16 29 43 59 75
April 16, 2014
WHY THE MONTNEY MATTERS

Spanning an area of roughly 150,000 km2 from west central Alberta into northeastern B.C., the Montney formation is currently the most dominant gas play in Western Canada. Early production from the Montney dates back to the 1950s, but focused drilling did not pick up until 2005 when producers began using horizontal wells to target Montney siltstones and tight sandstones. From a geological standpoint, the formation thickens from the eastern and northeastern erosional edge towards the west-southwest where the formation is up to 300 meters thick with three distinct intervals (lower, middle, upper). Vertical depths range from 500m 4,500m. It is important to understand that the Montney is not one play but many plays targeting various rock types from siltstone to very finegrained sandstone to relatively high permeability Coquina shell beds. The Montney formation was deposited over 10 million years in an arid climate similar to modern west coast Africa. It was deposited over many settings from offshore turbidite to distal and proximal shoreface environments, which is reflected in the numerous rock types and complexity of the reservoir. Generally speaking, as depth (and reservoir thickness) increases to the southwest, reservoir pressure increases and oil and liquid content decreases. Location of Montney Rock Types
Source: National Energy Board (NEB) Montney report published November 6, 2013
April 16, 2014
Alberta Montney cross-section thickens and deepens to the southwest
Source: ERCB/AGS Open File Report 2012-06 (October 2012), GMP
Based on a somewhat dated ultimate recovery potential study released on the Montney in 2012, between B.C. and Alberta, there is nearly 450 TCF of marketable gas from the Montney, enough to meet over 100 years of current Canadian gas demand. When we factor in the associated NGLs and oil, based on the expected case, there is nearly 80 billion barrels of equivalent marketable resource from the formation, making the Montney one of the largest hydrocarbon deposits in the world. Montney unconventional potential in B.C. and Alberta (as of 2012)
In Place Marketable Hydrocarbon Low Expected High Low Expected Natural gas (tcf) 3,197 4,274 5,405 316 449 NGL's (mmbbls) 87,360 126,931 176,783 1,540 2,308 Oil (mmbbls) 80,949 141,469 227,221 452 1,125 Barrel Equivalent (mmboe) 701,142 980,733 1,304,837 54,659 78,266 Source: National Energy Board (NEB) Montney report published November 6, 2013
High 645 3,344 2,430 113,274
April 16, 2014
Follow the money Montney drilling continues to attract majority of gas directed investment dollars In terms of producer capital allocation, the Montney formation is seeing by far the most capital allocation of all the natural gas resource plays in Western Canada. Assuming an average well cost of $6 million, we estimate 2013 saw over $4 billion in producer capital. From a pure licensing perspective, we estimate 2013 saw over 1,000 Montney gas wells licensed across Western Canada, nearly tentimes the amount of the next closest formation. In fact, licensing activity in the Montney was greater than the next nine formations combined. As a result of the increased drilling activity in the formation, we have witnessed a corresponding exponential increase in production from the formation. In the production exhibits below, we highlight hydrocarbon production exclusively from the Montney horizontal well bores. It is interesting to see how free condensate volumes have increased more recently, which we believe reflects the fact producer dollars are focused on the areas providing the highest liquids content. 2013 Western Canadian gas licensing activity Montney dominates
1050 875 700 2013 licenses YoY change 165% 130% 95% 60% 25% -10% -45%
2013 licenses
525 350 175 0
Source: geoSCOUT, GMP
Montney horizontal production history

3,000,000 Producing HZ wells 2,500,000 Gas Production (mcf/d) 2,500 3,000 40,000 Producing HZ wells 35,000 30,000
Gas production (mcf/d)
YoY change
3000 Oil production Condensate 2625 2250 1875 1500 1125 750 375 0
2003-01 2003-05 2003-09 2004-01 2004-05 2004-09 2005-01 2005-05 2005-09 2006-01 2006-05 2006-09 2007-01 2007-05 2007-09 2008-01 2008-05 2008-09 2009-01 2009-05 2009-09 2010-01 2010-05 2010-09 2011-01 2011-05 2011-09 2012-01 2012-05 2012-09 2013-01 2013-05 2013-09 2014-01 Horizotnal well count
Horizontal well count
2,000,000
2,000
Liquids production (bbl/d)
25,000 20,000 15,000 10,000 5,000 0
1,500,000
1,500
1,000,000
1,000
500,000
500
0
2003-01 2003-05 2003-09 2004-01 2004-05 2004-09 2005-01 2005-05 2005-09 2006-01 2006-05 2006-09 2007-01 2007-05 2007-09 2008-01 2008-05 2008-09 2009-01 2009-05 2009-09 2010-01 2010-05 2010-09 2011-01 2011-05 2011-09 2012-01 2012-05 2012-09 2013-01 2013-05 2013-09 2014-01
April 16, 2014
WHATS DRIVING THE ACTIVITY?

We see a number of factors behind the Montney formations dominance in Western Canadas gas drilling game. It is our belief that much of the success surrounding the Montney relates to, like most things, time and money. Producers have had nearly a decade of active horizontal drilling in the formation to establish areas that work and those that dont. Billions have been spent through the learning process to establish what we have today - more concentrated areas of activity and some of the most robust well economics in Western Canada. Key areas have been de-risked as producers are now focusing on improving type curves and well economics through various changes in drilling and completion techniques. Given where we see the Montney in the play life cycle we feel this is an opportune time to get exposure as an investor. Factors driving Montney development 1) Zeroing in on areas that work Activity is more focused on areas with higher liquids content In the exhibit below (left) we show a chronological map of Montney horizontal licensing activity across B.C. and Alberta (this includes both oil and gas wells). What is clearly evident is how the play has become concentrated in a handful of areas as opposed to the early days when drilling activity was much more dispersed. The figure on the right hand side displays free condensate yields from Montney horizontal gas locations (we omitted the oil wells to provide a better indication of true free liquids yields), with the point being there is a clear correlation between licensing activity and liquids yields in the formation. Montney oil and gas licensing activity more concentrated
2014 2013 2012 2011 2010 2009 2008 pre-2008
Montney gas producers and free condensate yields (IP60)

> 100 bbl/mmcf 50-100 bbl/mmcf 30-50 bbl/mmcf 20-30 bbl/mmcf 10-20 bbl/mmcf < 10 bbl/mmcf
April 16, 2014
2) Economics are undergoing a major transformation Now that producers have de-risked the most prospective Montney areas, the focus has shifted to improving the type curves and economics. Generally speaking, a number of producers are moving to a ball-drop completion technique, which has not only reduced completion costs, it has resulted in a material improvement to production type curves and ultimately economics. In the table below we display the impacts of four different Montney plays where the producers have recently shifted to a new completion method. The new completions are significantly increasing production rates, which is transferring to an improvement in well economics, with the average payout cut by more than half. Delphis Montney wells at Bigstone have undergone the most significant transformation as the old wells (gelled oil fracs) were marginally profitable and took over 4 years to pay out, compared to the new wells (hybrid slickwater fracs), which are massively economic, with an estimated payout of 6 months. Impact of new completion techniques on well performance and economics
Old
Well Perfromance
DEE - Bigstone
New
% change 19% 48% 956% -89%
Old
PPY - Townsend
New
% change 60% 0% 116% -63%
Old 2,678 35 $3.0 32
SRX- Umbach
New
% change 58% 3% 100% -53%
Old 3,176 0 $3.1 43
AAV- Glacier
New
% change 62% N/A 28% -47%
IP 30 (mcf/d) Liquids yield (bbl/mmcf)

Economics
4,689 73 $1.6 53
5,581 108 $16.6 6
4,381 14 $4.5 38
7,024 14 $9.7 14
4,244 36 $5.9 15
5,147 0 $4.0 23
BT NPV (10) ($mm) Well Payout (months)
Source: geoSCOUT, company reports, GMP
3) Montney is seen as the leading formation for LNG feedstock To date, the National Energy Board has received eleven applications for west coast LNG export licenses, for a total capacity of 21.2 bcf/d. Of the eleven, eight have been approved, with combined export capacity of 15.1 bcf/d, while the remaining four, which are still in the regulatory process, could add an incremental 5.1 bcf/d. While many of the project proponents already possess the upstream assets required for their facilities, four projects with a combined capacity of 4.0 Bcf/d (Woodfibre LNG Export Pte. Ltd., Jordan cove LNG L.P., Triton LNG L.P., and Kitsault Energy Ltd) lack the dedicated resources to supply their LNG projects, hinting these companies will be in the market for supply. LNG export license applications
Project KM LNG Operating General Partnership BC LNG Export Co-operative LLC LNG Canada Development Inc Pacific Northwest LNG Ltd WCC LNG Ltd Prince Rupert LNG Exports Ltd Woodfibre LNG Export Pte. Ltd. Jordan Cove LNG L.P. Triton LNG L.P. Kitsault Energy Ltd. Aurora Liquefied Natural Gas Ltd. Company/Ownership Apache/Chevron Haisla Nation/LNG Partners LLC Shell/PetroChina/Mitsubishi Corp/Korea Gas Corp Petronas - Progress/JAPEX/PetroluemBRUNEI Imperial Oil Resources Ltd/ExxonMobil Canada Ltd British Gas Group (BG) Pacific Oil & Gas Ltd Veresen Inc Altagas Pacific Partnership/Indemiitsu Kosan Co Ltd Kitsault Energy Ltd. CNOOC/INPEX Gas BC Ltd Export License Approved Approved Approved Approved Approved Approved Approved Approved Under Review Under Review Under Review Capacity (BCF/D) 1.3 0.2 3.2 2.6 3.9 2.8 0.3 0.8 0.3 2.6 3.2 21.2
Source: National Energy Board, GMP
April 16, 2014
ADDING FIVE NAMES TO OUR MONTNEY PORTFOLIO

In addition to the seven producers with material Montney gas exposure currently under coverage (ARX, BIR, CR, CQE, NVA, POU, RTK), we are increasing our Montney coverage portfolio to include an additional five names, each operating within a distinct area along the greater Montney fairway. The new names include: Advantage Oil and Gas, (AAV-T), Delphi Energy (DEE-T), Donnycreek Energy (DCK-V), Painted Pony Petroleum (PPY-T) and Storm Resources (SRX-V). We see the addition of these five names as key to rounding out our Montney gas coverage list and believe each name carries a unique characteristic, appealing to a wide breadth of investor demand. As we established early in this report, the roughly 150,000 km2 of Montney prospective land extending from west central Alberta to northeastern B.C. is extremely diverse and offers a number of different play types. We do not believe it is accurate to group all Montney producers in one basket, as economics are varied and producers are in different stages of the de-risk to exploitation lifecycle. There is no question surrounding the momentum of Montney producers year-to-date, with the group returning an average of 33%. Montney producers year to date share performance
60% 50% 40% 30% 20% 10% 0% -10% -20% -30%
AAV DEE DCK PPY SRX Average
Source: Bloomberg
April 16, 2014
MONTNEY SCORECARD
Breakdown of covered companies Montney plays
AAV
Montney Play / Area Glacier Upper Montney $5.50 $3.65 0.7x 26 858 0 0% 0.82
AAV
Glacier Middle Montney $6.60 $4.56 0.7x 26 704 39 19% 0.78
AAV
Glacier Lower Montney $5.80 $4.92 0.8x 24 704 10 6% 0.90
DEE
Bigstone Upper/ Middle Montney $9.20 $13.73 1.5x 9 1,090 108 39% 1.23
DCK
PPY
SRX
ARX
BIR
CR
CQE
Simonette Upper Montney $7.50 $5.34 0.7x 28 921 30 15% 0.98
NVA
NVA
POU
POU
Well costs NPV PIR Payout IP (30) IP (30) liquids content IP (30) liquids content EUR
($mm) ($mm) (ratio) (months) (boe/d) (bbls/mmcf) (% ) (mmboe)
Blair & Parkland Townsend Kakwa Upper / Umbach - Middle & Middle Upper Lower Middle Montney Montney Montney Montney $10.00 $7.20 $5.00 $5.25 $9.88 $6.59 $5.91 $5.65 1.0x 0.9x 1.2x 1.1x 19 22 15 10 855 150 47% 0.88 893 14 8% 1.21 860 36 18% 0.88 767 25 13% 1.04
Septimus Pouce Upper, Coupe - Middle and Lower Lower Montney Montney $6.00 $4.70 $4.06 $3.91 0.7x 0.8x 32 11 597 6 3% 0.90 906 30 15% 0.90
Musereau / Kakwa Karr / Gold 100 Bilbo South Bilbo North Creek bbls/mmcf Montney Montney Montney Montney $9.00 $9.00 $8.00 $8.00 $9.51 $7.00 $5.37 $12.25 1.1x 0.8x 0.7x 1.5x 14 21 23 8 1,270 105 39% 0.89 1,318 73 30% 0.93 1,083 50 23% 0.74 1,333 100 38% 0.91
Source: geoSCOUT, Company reports, GMP
denotes new coverage
Ranking Montney plays

IP30 (boe/d ) 1,400 1,200 IP(30) boe/d 1,000 800 600 400 200 0 IP(30) boe/d Average IP30 liquids (bbls/mmcf) 160 140 IP(30) bbls/mmcf 120 100 80 60 40 20 0 IP(30) Liquids Average
Profit - Investment Ratio 1.6x 1.4x Profit Investment Ratio 1.2x 1.0x 0.8x 0.6x 0.4x 0.2x 0.0x PIR Average
Payout Period (months) 30 25 Payout (months) 20 15 10 5 0 Payout Average
Source: geoSCOUT, Company reports, GMP
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April 16, 2014
New names offer a taste for every palate All the companies covered in this report have primary assets producing natural gas out of the Montney formation, however, in many ways this is where the similarities both start and end. Of the five companies, 2014 production estimates range from over 20,000 boe/d, down to the 1,500 boe/d range and cover various stages of the company (and play) lifecycle. Additionally, production varies from 100% gas to a 50/50 mix of gas and NGLs. Forecast production and gas weighting
30,000 2014 24,000 2015 % gas (2014E) 80% 100%
Average annual production (boe/d)
18,000
60%
12,000
40%
6,000
20%
AAV
PPY
DEE
SRX
DCK
0%
Source: Company reports, GMP Securities
NEW NAMESFROM 30,000FT

Advantage Oil & Gas What we like: Well-delineated Montney resource, with 83 wells drilled in upper Montney and 21 wells into the lower Montney. Recent middle Montney success offers potential to double resource on the play and add a liquids component. Fully funded development plan should result in a 21% production CAGR over next three years. Cautionary notes: Significant delineation of middle Montney remains, with only nine wells drilled to date into two of three potential layers. Delphi Energy What we like: New completion techniques appear to be a game changer with wells showing $16 million NPV potential. Already up the learning curve investors are now paying for execution and face less reservoir risk. 2013 was a year for operational improvements, we see 2014 as the year Delphi significantly improves its financial position. Cautionary notes: New corporate type curve appears to be reflective of some of the companys best performing Bigstone Montney wells.
11
% gas
April 16, 2014
Donnycreek Energy What we like: Appear to have a top quality land position in one of the most liquids-rich areas of the Montney gas fairway. Majority of drilling activity has focused on the Middle Montney interval, while the most recent well successfully tested the Upper Montney, resulting in a potential doubling of the companys drilling inventory. Has the largest contiguous land base in the Montney prospective Wapiti area. Early well results suggest there is much more work to be done here but, if successful, we believe this is the ticket to the company being acquired. Cautionary notes: Small cap producer in a capital-intense play (wells cost upwards of $10 million), meaning until the company reaches a higher critical mass, access to capital will be important to play development. Painted Pony Petroleum What we like: LNG upside: 7.0 tcfe of contingent resource and a clear line of sight to the West Coast. Type curves have seen a material improvement with the recent switch to ball-drop completion technology. Operational momentum clearly in Painted Ponys favour as the company recently increased 2014 average production guidance by nearly 15% on the back of initial production rates from four new wells. Cautionary notes: LNG projects and timelines are uncertain and 5-year growth plan may be scaled back if the company does not have required capital. Storm Resources What we like: Proven management team with a history of value creation over the previous 3 iterations of Storm. Potential to be a consolidator in the Umbach area; acquired Montney assets from Yoho in January 2014. Conservative reserve bookings leave considerable unbooked upside reserve bookings are currently based on 8% of Storms Umbach land position. Cautionary notes: Well economics are driven by liquids yields, which exhibit significant variability. Good news is liquids rates are trending in the right direction.
12
April 16, 2014
HOW THEY STACK UP

Within this section of the report, we compare the five new companies to their gas-weighted peers on four metrics: 1) Growth Both production and cash flow per share 2) Operating measures Cash flow netbacks and cost structure 3) Valuation Cash flow, production and NAV-based 4) Balance sheet Debt relative to cash flow and debt relative to production Growth: Our comparative metrics for growth include production per share and cash flow per share. Our average projected production per share growth for the gas-weighted small to mid-cap names sits just over 20% (2014). Ignoring Donnycreeks over threefold projected increase, amongst the new names, we are forecasting production per share to increase by an average of 25%, with Painted Pony leading the way. Given the continued improvements in Montney type curves, we foresee growth rates expanding from our current estimates. Given the recent increase in natural gas prices (when compared to 2013 levels) cash flow per share growth is much more pronounced. On average, we are forecasting the groups cash flow to rise 80% in 2014, with our new names increasing by an average of 85%. Comparative growth metrics production and cash flow
80%
2014E 2015E
150%
2014E 2015E
Production per share growth (% )
60%
40%
CFPS Growth (% )
DCK KEL PPY CQE BIR DEE RTK SRX PNE AAV CTA CR NVA
100%
50% 20%
0%
0%
DCK
KEL
PNE
AAV
DEE
PPY
CQE
NVA
BIR
SRX
RTK
CTA
CR
Source: Company disclosures, GMP
Netbacks and cost structure: Low-cost structure and strong realised pricing help drive asset profitability. Therefore, it should come as no surprise those companies with a higher weighting to liquids and low-cost structure are forecast to have the strongest cash flow netbacks. The average forecast 2014 cash flow netback for the group is $23.15/boe, with our new names falling right in line. Given the relatively low finding costs in the Montney, we believe these producers will continue to deliver strong recycle ratios.
13
April 16, 2014
Comparative netbacks and cash costs

$20 $40 100% Interest G&A Transport $16
Cashflow netbacks ($/boe)
$20
50%
2014E Cash costs ($/boe)
$30
75%
Gas weight (%)
$12
$8
$10
25%
$4 $0 DCK CTA BIR KEL RTK NVA 2014E CR AAV SRX PPY CQE DEE PNE STE Gas Weight $0 AAV CTA PNE CQE BIR SRX KEL PPY NVA DEE CR RTK STE DCK 2015E 0%
Valuations: When comparing the relative valuations of the five companies with the larger peer group, we note that on average the Montney producers tend to trade at higher multiples. Painted Pony and Storm have of the three highest EV/DACF multiples in the group. The same can be said when looking at the valuation multiple from a production metric standpoint. Given the Monteny resource potential, operational momentum, and recent type curve improvements seen in the play, we do feel any sort of premium valuation multiple is justified. On average, our junior-intermediate gassy names trade at a 2014 EV/DACF multiple of 9.2x; this falls to 7.5x in 2015 on the back of a strong group growth profile. On average, our new Montney names trade at a slight premium in 2014 (9.8x), but given the better than average projected growth profiles, they trade at a slight discount in 2015 (7.4x). Comparative valuation metrics
16.0x 14.0x 12.0x
2014E 2015E
$120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $0
2014E 2015E
EV/DACF
8.0x 6.0x 4.0x 2.0x 0.0x CTA PNE BIR AAV CQE CR DCK DEE RTK STE NVA PPY SRX KEL
EV/boe/d 2014E
10.0x
PNE STE CTA CQE AAV DEE CR
BIR RTK PPY NVA DCK KEL SRX
14
April 16, 2014
What are you paying for from a NAV basis? From a standpoint of resource upside potential, our new Montney producers are trading at a premium to their Base NAV (outside of DCK, but we believe this discount is due to the recent results from their Wapiti Montney play), meaning the market is giving these names value for their unbooked upside. In terms of relative value to Risked NAV, Delphi appears most attractive as the stock is trading at a slight premium to its Base NAV, which only includes 21 non-producing East Bigstone locations (representing roughly 2.5 years of drilling activity), signifying the reserve report is not aggressive by any means. Current share price relative to their NAVs
$18.00 Risked Upside NAV Base NAV Current Price $18.00
$13.50
$13.50
$9.00
$9.00
$4.50
$4.50
$0.00 PPY AAV SRX DEE DCK
$0.00
Balance sheet: Generally speaking, balance sheet strength amongst our gas-weighted juniors and intermediates is pretty healthy, thanks to strong first quarter pricing. On average, the group is carrying a trailing 2014 D/CF ratio of 1.2x, with our new names falling in line with this average. On a utilization basis, the new Montney names have drawn roughly 70% of their bank line, although we suspect lending lines will be expanded given the fact reserve reports have recently been updated. Comparative balance sheet metrics
2.0x
2014E 2015E
-$5,000 $0 $5,000 NVA $10,000 $15,000 CQE DEE CTA BIR RTK 100% 80% 60% Bank line utilization 40% 20% 0% CR DCK SRX AAV KEL
1.5x
1.0x
D/CF
Net debt/boe/d
PPY
STE
0.5x
0.0x
PNE KEL DCK NVA PPY SRX BIR STE CQE AAV CTA CR DEE RTK
-0.5x
$20,000 120%
15
Curent Price ($/share)
NAV/share
R. Jason Konzuk, CA, CFA rjkonzuk@gmpsecurities.com (403) 543-3587 April 16, 2014
Associate: Gabriel Chow gchow@gmpsecurities.com (403) 543-3035
Advantage Oil and Gas Ltd

Peeling back the layers of Montney
Rating Target Production 2014E (boe/d) 6:1 Production 2015E (boe/d) 6:1 CFPS 2014E (f.d.) CFPS 2015E (f.d.) SHARE DATA Shares o/s (mm, basic/f.d.) 52-week high/low Market Capitalization (mm) Enterprise value (mm) Net Debt (mm) 2013A Projected Return Dividend Yield FINANCIAL DATA Oil and NGLs (b/d) Natural Gas (mmcf/d) Total (mboe/d) 6:1 21,678.5 Equivalent growth WTI (US$/b) HHUB (US$/mmbtu) FX rate (USD/CAD) EPS (f.d.) CFPS (f.d.) Net debt (mm) Net Debt/CF VALUATION P/CF EV/DACF EV/boe/d EV/2P reserves (YE13) P/(2P) NAV P/Risked Upside NAV
$6.50 $6.00
Close Price
NC NC NC 27,134 $1.03 $1.15
BUY $8.00 22,065 27,134 $1.03 $1.15
BUY
AAV-T Target $6.00 $8.00
Three-year plan to grow production at a 21% CAGR Advantage is a Montney-focused producer that has been operating at Glacier since 2008. This asset has become the sole focus of the company after years of divesting its remaining properties in order to concentrate on Montney development. The last step in Advantages Montney-focused evolution came recently when the company concluded its strategic review, divested of its 45% interest in Longview Oil Corp. and embarked on a fully funded three-year plan targeting strong production and cash flow per share growth. Advantages three-year development plan will see the company spending $735 Mm over that period to drill an average of 33 wells in each year. The company expects to grow production from 135 Mmcf/d in Q114 to 245 Mmcf/d in Q217, which represents a 21% compounded annual growth rate. In addition, Advantage expects to grow its liquids production to 1,500 bbls/d during the same time frame by targeting the middle Montney while maintaining its standing as a leading low-cost producer. This plan is fully funded, with debt to forward cash flow remaining below 1.3 times, according to our forecast. Low-risk development with resource upside The companys upper and lower Montney layers offer a well-defined inventory of low-risk development while we believe the middle Montney has the potential to more than double the companys drilling inventory and appears capable of demonstrating rates of return comparable to the upper and lower Montney layers. Advantages current phase of development (Phase VII) will concentrate on initial development of the middle Montney, proving up the liquids content in the third layer of the middle Montney. In addition, Advantage continues to advance completion techniques and recent results provide encouragement that EURs and rates of return will improve from already attractive levels. Initiating coverage with a BUY rating and $8.00 target price Consistent with the target price methodology for the majority of our companies under coverage, we utilize a combination of our Risked NAV designed to assess the value of unbooked resource and a cash flow multiple approach. Our $8.00 target price is based on a Risked NAV of $8.51/share and a 2015E EV/DAC multiple of 8.0 times.
16
168.4/181.4 $6.00/$3.60 $1,089 $1,378 $290 33% N/A
2013A 507 113.9 19,498 -10% $97.99 $3.73 $0.97 -$0.05 $0.50 $290 3.4x
2014E 198 131.2 22,065 13% $95.90 $4.50 $0.90 $0.42 $1.03 $250 1.4x
2015E 688 158.7 27,134 23% $95.00 $4.25 $0.90 $0.42 $1.15 $326 1.7x
11.9x 14.7x $73,254
5.8x 7.7x $62,929
5.2x 7.1x $53,966 $4.88 1.7x 0.7x

9.0
AAV-T
$5.00 $4.50 $4.00 $3.50 $3.00 May -13 Jul-13 Sep-13 Nov -13 Jan-14 Mar-14
6.0
3.0
.0
Volume (Millions)
$5.50
April 16, 2014
WHAT YOU NEED TO KNOW

1) Three-year Montney development plan 2) Newly acquired Montney lands 3) Valuation and target price
1) Three-year Montney development plan

Advantage is a Montney-focused producer that has been operating at Glacier since 2008. This asset has become the sole focus of the company after years of divesting of its remaining properties in order to concentrate on Montney development. The last step in Advantages Montney-focused evolution came recently when Advantage disposed of 21.2 Mm shares in Longview Oil Corp. at $4.45 per share for $94.1 Mm, which will support its Montney development growth plan. Advantage has a $300 Mm credit facility and will be $78 Mm drawn on the facility post the disposition of its Longview shares. The company intends to maintain a conservative balance sheet which targets a debt to forward cash flow ratio of 1.5 times. Advantages three-year development plan will see the company spend approximately $735 Mm over that period and will drill an average of 33 wells in each year. The company expects to grow production from 135 Mmcf/d in Q114 to 245 Mmcf/d in Q217, which represents a 21% compounded annual growth rate. In addition, Advantage expects to grow its liquids production to 1,500 bbls/d during the same time frame by targeting the middle Montney. The company has driven operating costs to $0.28 per mcfe. Its focus for the Phase VII (Q214Q115) development at Glacier will be proving up its middle Montney resource. As for the underlying economics, the key assumption underpinning our forecast model is that Advantage is able to add production at a full cycle cost of $20,000 per boepd, which would be keeping with the companys historical performance at Glacier.
2) New Montney lands

Advantage recently acquired 43.25 net sections southeast of its Glacier lands in late 2013 (see map on pg. 20). The company undertook a comprehensive core and completion study in 2012 and believes that the stronger liquids content on the eastern side of Glacier extends liquids potential to its newly acquired lands. As well, the technical work indicates a thick Montney formation and multiple layer potential on the newly acquired lands.
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April 16, 2014
3) Valuation and target price

Relative performance of AAV to gas weighted peers
100% 80%
60%
40%
20%
0%
-20%
-40% 1-Nov-13
15-Nov-13
29-Nov-13
13-Dec-13 BIR Equity DEE Equity
27-Dec-13
10-Jan-14
24-Jan-14 KEL Equity CR Equity
7-Feb-14 CTA Equity AAV Equity
21-Feb-14
7-Mar-14 PNE Equity Average
21-Mar-14 SRX Equity
4-Apr-14
CQE Equity RTK Equity
PPY Equity NVA Equity
Source: Bloomberg, GMP Securities
Since the natural gas equity rally began in November 2013, Advantage shares have only returned 34% while its junior gas-weighted peers have returned 41%. When compared against its peers, Advantage trades at a discount on most valuation metrics. On a 2014 production basis, Advantage trades at a 17% discount, while on a cash flow and debt adjusted cash flow basis Advantage trades at 17% and 11% discount respectively. Comparable valuations
Valuation
Production Company Name Artek Exploration Ltd. Birchcliff Energy Ltd Cequence Energy Ltd. Crew Energy Inc. Crocotta Energy Inc. Delphi Energy Corp. Kelt Exploration Ltd. NuVista Energy Ltd. Painted Pony Petroleum Ltd. Pine Cliff Energy Storm Resources Advantage Oil & Gas Ltd Median AAV vs Median Ticker RTK BIR CQE CR CTA DEE KEL NVA PPY PNE SRX AAV 2014E (boe/d) 4,708 33,567 13,500 25,581 9,600 10,330 10,908 18,194 12,926 6,354 5,988 22,065 10,908 102% % Gas 2014E (%) 63% 82% 86% 52% 73% 71% 72% 69% 85% 95% 79% 99% 73% 36% PPS Growth 2014E (%) 15% 26% 31% -7% 6% 25% 48% -12% 47% 14% 14% 13% 15% -15% D/CF 2014E (x) 2.1x 1.2x 1.4x 1.6x 1.4x 2.0x 0.0x 0.8x 0.8x -1.0x 0.9x 1.4x 1.2x 24% EV/DACF 2014E (x) 8.5x 7.3x 7.5x 7.7x 5.4x 8.4x 16.0x 10.0x 11.8x 6.4x 13.7x 7.5x 8.4x -11% 2015E (x) 6.5x 6.6x 6.4x 5.9x 4.7x 7.1x 11.4x 7.7x 9.9x 7.5x 10.3x 6.9x 7.1x -2% EV/boe/d 2014E $/boe/d $80,261 $72,665 $57,248 $72,137 $54,395 $63,310 $92,902 $91,005 $90,859 $43,378 $109,053 $60,663 $72,665 -17% 2015E $/boe/d $69,045 $60,394 $50,044 $53,270 $47,134 $53,885 $109,693 $70,244 $72,671 $43,245 $79,754 $52,123 $60,394 -14% 2014E (x) 6.7x 5.7x 6.1x 6.9x 3.9x 7.0x 15.5x 9.4x 11.2x 7.3x 12.9x 5.8x 7.0x -17% P/CF 2015E (x) 5.0x 5.1x 5.0x 5.5x 3.3x 5.9x 10.9x 7.2x 8.5x 8.6x 9.7x 5.2x 5.9x -11%
Source: Company disclosures, GMP Securities
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April 16, 2014
Risked NAV discussion

Advantages reported 2013 reserves showed a total proved plus probable reserves of 282 mmboe and are weighted 95% to natural gas. With increased middle Montney activity in 2013, Advantage grew its natural gas liquids 2P reserves by five times (2.6 mmbbl to 13.0 mmbbl). Of the 172 Mmboe of total proved reserves, proved producing reserves represent 20%. Based on our GMP price deck, we estimate Advantages base 2P NAV to be $3.62 share (details below). Risked upside o The company will be allocating its capital budget evenly among the three layers of the Montney for its three-year plan. The upper Montney and the lower Montney have a significant amount of well performance history and we have included the two layers in our risked NAV. Most of the upper Montney has already been booked into 2P reserves, while the lower Montney contains significant unbooked potential. For the middle Montney, the company has received reserve recognition for the upper two of the three layers within the middle Montney. As such, we have ascribed value to those two middle Montney layers. Given the early nature of middle Montney 1 and middle Montney 2, we could see more upside with both layers as Advantage is focused on proving up the middle Montney while continuing to adjust its completions techniques to improve overall well performance and EURs.
When we combine our Base NAV and Risked upside development scenario, we calculate a Risked NAV for Advantage of $8.51 per share. Details of both our Base and Risked NAV can be found in Exhibit 3.
2013 YE Assigned Reserves Reserves BT PV@10% (mmboe) ($mm) Proven 172.3 $642.4 Probable 110.3 $368.4 2P Reserves 282.6 $1,010.8 Value Other Assets/Liabilities ($mm) Land Value (256,000 acres @ $200 per acre) $25.1 Net Debt ($289.7) Option Proceeds & Other ($88.6) Total ($353.1) 2013 YE 2P Net Asset Value $657.7 Net Net Risked Unbooked Upside Potential Locations Resource BT PV@10% (mmboe) ($mm) Upper Montney 60 49.4 $106.1 Middle Montney - 1 286 222.9 $289.9 Middle Montney - 2 280 218.2 $91.9 Lower Montney 234 211.2 $398.3 Total 1140 919.8 $886.2 2P NAV + Risked Upside Value $1,543.9 $NAV/ Share $3.54 $2.03 $5.57 $NAV/ Share $0.14 ($1.60) ($0.49) ($1.95) $3.62 $NAV/ Share $0.58 $1.60 $0.51 $2.19 $4.88 $8.51
Base and Risked NAV breakdown
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April 16, 2014
Target price calculation Consistent with the target price methodology for the majority of our companies under coverage, we utilize a combination of our Risked NAV and a 2015 EV/DACF multiple. For Advantage, our $8.00 target price is based on a Risked NAV of $8.51/share and a 2015E EV/DACF multiple of 8.0 times.
CORE AREA OVERVIEW

Glacier Advantage has assembled 120.35 net sections of land with Montney exposure. Glacier currently represents the companys sole operating area and due to its contiguous land base and dedicated gas processing and gathering systems, Advantage has been able to demonstrate industry-leading operating costs. Multi-layered Montney development coupled with the low sulphur content and limited liquids-handling has contributed to the low operating cost profile at Glacier and the attractive economics of the play. Advantage recently acquired 43.25 net sections southeast of its Glacier lands in late 2013 (see Exhibit 4). The company has performed a core and completion study and believes that the stronger liquids content on the eastern side of Glacier extends liquids potential to its newly acquired lands. As well, the technical work indicates a thick Montney formation and multiple layer potential on the new lands. The company owns 100% of a 160 Mmcf/d gas plant at Glacier and is expanding the facility by installing a compressor and refrigeration unit that will bring total capacity to 245 mmcf/d. This will allow Advantage to extract NGLs from the middle Montney and lower Montney layers. Advantage Oil and Gas core area map
Glacier
Source: geoSCOUT, GMP Securities
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April 16, 2014
CORPORATE DECLINES
A benchmark used to determine whether or not a company is capable of delivering on production targets is its production decline rate. While we estimate that 62% of its production is declining at ~14% per year, the impact of the initial declines of newly drilled wells are characteristic of multi-stage fracture stimulated wells and pulls the overall corporate decline rate to ~35%. We expect this decline rate to moderate over time as the production base matures. Growth targets should be achievable when the low on-stream costs of the Montney are considered. Production profile and decline rates by vintage year
Prior to 2008 25,000 2008 2009 2010 2011 2012 2013
20,000
15,000
boe/d
10,000 5,000 2009-01
2009-07
2010-01
2010-07
2011-01
2011-07
2012-01
2012-07
2013-01
2013-07
Source: geoSCOUT, company disclosures, GMP Securities
EVALUATING SUSTAINABILITY INVENTORY

Advantage believes the optimal recovery scheme for the various Montney layers at Glacier is to develop them both laterally and vertically, offsetting each other. Based on four wells per section within the four Montney layers that currently enjoy reserve recognition, we believe Advantage has an inventory of approximately 1,140 future drilling locations.
RISKS TO OUR THESIS

Natural gas price volatility: Advantage has hedged 66.8 Mmcf/d or 52% of its 2014 production at $3.83 per mcf from Q214 to Q115, which serves to protect its capital program. In addition, Advantage has further mitigated exposure to the risk of natural gas price volatility by maintaining balance sheet flexibility and its low cost structure. Asset concentration: Effectively all of Advantages corporate production comes from its Glacier core area, which creates asset concentration risk. It is worth pointing out the takeaway capacity risk is somewhat mitigated as Advantage could deliver its liquids-rich natural gas into the Alliance pipeline (Aux Sable pipeline) as well as accessing a third-party extraction facility (Wembley Deep Cut Plant) through an existing pipeline interconnection.
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April 16, 2014
RESOURCE
Sproules resource assessment as of March 31, 2013, featured Discovered Petroleum in Place (DPIIP) of 13.9 Tcf and a best estimate of Economic Contingent Resource (ECR) of 4.2 Tcfe (810.2 mamboed) on its 77.1 net sections at Glacier. NGLs represented 110.3 Mmboe, which translates into a NGL yield of 31 bbls/mmcf. The company has 298 net locations booked to reserves on the play for a total of 1.6 Tcfe. Rates of return offered by the Montney at Glacier continue to improve. In 2009, the companys F&D cost (incl FDC) was $9.82 per boe and has trended downward, coinciding with the changes in completion techniques and subsequently improving well results. This can be seen in its 2013 reserve update which saw positive technical revisions representing 25% of 2P reserve additions. In its 2013 reserve update, the company added 53.5 mboe at a cost of $7.99/boe or $1.33/mcfe (F&D incl FDC). Using Advantages 2013 cash flow netback of $11.99/boe the company posted a 1.5 times recycle ratio. Using a three-year average F&D cost of $6.36/boe, this drives a 1.9 times recycle ratio. The Montney thickness averages 290 meters over Advantages land block. Based on delineation, core and completion studies, Advantage believes five Montney layers are commercial. The company has determined of the five Montney layers, the three middle Montney layers are liquids-rich, with liquids contents improving toward the eastern margin of its lands. Upper Montney Advantage has drilled a total of 83 horizontal wells into the upper Montney at Glacier and has seen improving well performance and EURs as it has continued to refine completion techniques. Wells drilled in 2009 saw an average IP(90) rate of 2.9 Mmcf/d, which improved to 3.5 Mmcf/d in 2011. In 2013, Advantage moved from 13-stage poly CO2 fracs to 17-stage slickwater fracs, and wells completed with the modified techniques saw IP (90) rates of 4.5 mmcf/d, which is approximately a 1.5 times improvement from its wells drilled in 2009. The increased rates were reaffirmed with its 2013 reserve update, as upper Montney wells received a positive technical revision of 14% which saw EUR assignment increase from 4.7 bcf per well to 5.4 bcf per well.
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April 16, 2014
Well performance by vintage

4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 1 7 13 19 25 31 37 43 49 Producing Months Phase II Phase III Phase IV
Our upper Montney type cure reflects an EUR of 4.9 Bcf and delivers a NPV of $3.6 Mm assuming a $5.5 Mm well cost. The type curve implies a half cycle on-stream efficiency of $7,300/boepd, an IRR of 38% and a 26-month payout. Advantage has booked 252 total wells into the upper Montney and we believe the company has a remaining unbooked inventory of 60 drilling locations. Upper Montney type curve
6,000 5,000 4,000 3,000 2,000 1,000 0 3,000 2,500
Mcf/d
2,000 1,500 1,000 500 0
25 37 49 Months on Production Production (Mcf/d) Cumulative Production (Mmcf)

Assumptions Well Costs ($mm) IP 30 (Mcf/d) EUR (Mmcf) % Liquids Year 1 Decline (%) Year 2 Decline (%) $5,500 5,147 4,942 0% 63% 36% Risked Economics BT NPV (10%) ROR (%) Well Pay outs (months) Half Cy cle F&D ($/boe) PIR (times) Recy cle Ratio (times)
13
61
$3,644 38% 26 $6.68 1.7 2.9
23
Cumulative Production (Mmcf)
Risked Production (Mcf/d)
April 16, 2014
Middle Montney Advantage believes that its middle Montney contains three productive zones which are all liquids-bearing. The company has drilled a total of nine horizontal wells into the middle Montney, of which six wells have been drilled into layer one of middle Montney (middle Montney 1) and three wells have been drilled into layer two of the middle Montney (middle Montney 2). No wells have been drilled yet into layer three of the middle Montney (middle Montney 3), which is why no reserves have been awarded to that interval. In Advantages 2013 reported reserves, the company received recognition in two of the three layers within the middle Montney. The middle Montney 1 saw the total wells booked double from 21 wells to 46 wells and the middle Montney 2 total wells booked increase to 23 wells from one well. Liquids are pervasive through the entire Glacier land block and wells drilled in Phase VI (Q213Q114) confirmed Advantages geological model that liquids yield increase up-dip (west to east) across its Glacier lands. Advantages 2013 reserve report saw the middle Montney wells receive an average yield of 39 bbls/mmcf of NGLs reserves and it is worth noting that the company believes the liquids yields are stronger on the eastern side of Glacier. The company has transitioned from cluster frac and lower pump rates to open hole packer design with higher pump rates and we continue to expect the completion design to change, which would trend towards more frac stages and high frac rates. Middle Montney 1 type curve
4,000 3,500 2,500
3,000 2,500 2,000 1,500 1,000 500 0 1 25 37 49 Months on Production Production (Mcf/d) Cumulative Production (Mmcf) 13 61
1,500 1,000 500 0
Assumptions Well Costs ($mm) IP 30 (boe/d) EUR (mboe) % Liquids Year 1 Decline (%) Year 2 Decline (%) $6,600 704 779 19% 58% 27%
Risked Economics BT NPV (10%) ROR (%) Well Pay outs (months) Half Cy cle F&D ($/boe) PIR (times) Recy cle Ratio (times) $4,560 40% 26 $8.47 1.7 2.7
24
2,000
April 16, 2014
Our middle Montney 1 type cure reflects an EUR of 779 mboe and delivers a NPV of $4.5 Mm assuming a $6.6 Mm well cost. The type curve implies a half cycle on stream efficiency of $8,800/boepd, an IRR of 40% and a 26 month payout (see Exhibit 8). The company has booked 46 locations in its 2013 reserve report and we believe Advantage has another 286 drilling locations. Lower Montney A total of 21 horizontal wells have been drilled into the lower Montney at Glacier. The companys 2013 reserve report saw future undeveloped lower Montney wells assigned 5.1 Bcf per well (was 5.0 Bcf per well). The lower Montney offers a modest liquids content, as when lower Montney production is run through a refrigeration unit Advantage is able to extract approximately 10 bbls/mmcf of NGLs. Our lower Montney type curve reflects an EUR of 5.1 Bcf (902 mboe) and delivers a NPV of $4.9 Mm assuming a $5.8 Mm well cost. The type curve implies a half cycle on-stream efficiency of ~$9,300/boepd, an IRR of 46% and a 24 month payout (see Exhibit 9). In Advantages 2013 reserve report, 94 locations were booked and we believe the company has an additional 234 drilling locations remaining. Lower Montney type curve
4,500 4,000 3,000 2,500 2,000 1,500 1,000 500 0
3,500 3,000 2,500 2,000 1,500 1,000 500 0 1 13 25 37 49 Months on Production Production (Mcf/d) Cumulative Production (Mmcf)
Assumptions Well Costs ($mm) IP 30 (boe/d) EUR (mboe) % Liquids Year 1 Decline (%) Year 2 Decline (%) $5,800 3,892 779 6% 47% 31% Risked Economics BT NPV (10%) ROR (%) Well Pay outs (months) Half Cy cle F&D ($/boe) PIR (times) Recy cle Ratio (times) $4,919 46% 24 $6.43 0.8 2.9
61
25
April 16, 2014
CONCLUSION
We are initiating coverage of Advantage Oil and Gas Ltd with a BUY rating and $8.00 target price. The companys upper and lower Montney layers offer an inventory of lowrisk development. While delineation of the middle Montney layer is still in the early stages, recent results appear to demonstrate rates of return at least similar to the upper and lower Montney, with potential upside provided by its liquids-rich nature. In addition, the companys land acquisition southeast of Glacier in late 2013 is still unproven but may provide additional upside when the company decides to begin exploration activities on the acquired lands. We also do not believe Advantages discount to the Montney peer group is warranted. Its projected 21% production growth CAGR over its three-year development plan appears low risk, funded and consistent with past results. In addition, Advantages land base has been under development since 2008 and has been largely delineated. While the stock has performed very well since the conclusion of its strategic plan, we believe the re-rating currently underway can go further.
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April 16, 2014
APPENDIX A: ADVANTAGE OIL & GAS OPERATING AND FINANCIAL INFORMATION

Advantage Oil & Gas Ltd
high low AAV
Rating BUY Price Target $8.00 Total Return 33%
Jason Konzuk - 403.543.3587 rjkonzuk@gmpsecurities.com Gabriel Chow - 403.543.3035 gchow@gmpsecurities.com 2013A $3.28 183% 11.9x 14.7x $73,254 $8.07 $4.92 4.1 20.4 34.0 0.09 --2013A ($8) $108 $99 $0.51 $0.50 ($155) $0 $0 ($155) 2014E ----5.8x 7.7x $62,929 ----------0.10 --2014E $71 $104 $175 $1.04 $1.03 ($225) $0 $0 ($225) 2015E ----5.2x 7.1x $53,966 ----------0.13 --2015E $71 $123 $194 $1.15 $1.15 ($270) $0 $0 ($270)
Company Overview Price as of 04/15/14 52 week High - Low Fully Diluted Shares Outstanding Market Capitalization Net Debt Preferred Shares Enterprise Value Commodity Price Assumptions WTI (US$/bbl) Edmonton Par (C$/bbl) WCS (C$/bbl) Nymex (US$/mcf) AECO (C$/mcf) Exchange Rate (US$/C$) Realized Prices Crude Oil & Liquids (C$/bbl) Natural Gas (C$/mcf) Production Hedged (%) Daily Production Crude Oil & Liquids (bbls/d) NGL (bbl/d) Heavy (bbl/d) Total Liquids (bbls/d) Natural Gas (mmcf/day) Total Production (boe/d) YoY Production Change % Natural Gas % Crude Oil & Liquids Income Statement ($MM) Oil & Gas Revenue Hedging Gains/(Losses) Gross revenue Royalties Operating Transportation Net Operating Income Expenses G&A Interest DD&A Other Total Expenses Earnings Before Tax Income Tax (Recovery) Net Income EPS (basic) EPS (diluted) Corporate Netback ($/boe) Revenue Hedging Royalties Opex Operating Netback G&A Interest Expense Cash Taxes and Other Cash Flow Netback $30.00 $25.00 $20.00
$/boe
($/share) ($/share) (MM) ($MM) ($MM) ($MM) ($MM)
$6.00 $6.00
$3.60 184.4 $1,106 $283 $0 $1,390
2013A $97.99 $93.44 $78.01 $3.73 $3.17 $0.97 2013A $85.87 $3.03 --2013A 249 258 0 507 113.9 19,498 -10% 97% 3% 2013A $137 $3 $140 ($8) ($21) $0 $112
2014E $95.90 $99.02 $85.60 $4.53 $4.67 $0.90 2014E $97.03 $4.77 55% 2014E 178 19 0 198 131.2 22,065 13% 99% 1% 2014E $235 ($20) $215 ($12) ($14) $0 $188
2015E $95.00 $97.78 $87.78 $4.25 $4.06 $0.90 2015E $95.78 $4.16 36% 2015E 665 23 0 688 158.7 27,134 23% 97% 3% 2015E $265 ($15) $250 ($16) ($18) $0 $216
Key Valuation Ratios Net Asset Value ($/share) P/NAV (%) P/CF (x) EV/DACF (x) EV/Production ($/boe/d) EV/1P Reserves ($/boe) EV/2P Reserves ($/boe) PDP RLI (years) 1P RLI (years) 2P RLI (years) DA Production per Share (boe/d) DA 2P Reserves per Share Cash Flow Statement ($Mm) Operating Activities Net Income Non-Cash Items CF from Operations (Adj.) CFPS (basic) CFPS (diluted) Investing Activities Exploration and Development Net Acquisitions Reclamation Fund/Other CF from Investing Financing Activities Change in Total Debt Shares Issued Dividends/Other CF from Financing Activity Leverage Net Debt Bank Debt Net Debt-CF (Trailing) Net Debt-CF (Forward) Credit Facility % Unutilized Shares Outstanding ($Mm) WA Outstanding Shares (basic) WA Outstanding Shares (diluted) GMP Net Asset Value 2013 YE Assigned Reserves Proven Probable 2P Reserves Other Assets/Liabilities Land Value (256,000 acres @ $200 per acre) Net Debt Option Proceeds & Other Total 2013 YE 2P Net Asset Value Unbooked Upside Potential Upper Montney Middle Montney - 1 Middle Montney - 2 Lower Montney Total 2P NAV + Risked Upside Value
$56 $0 $0 $56 2013A $290 $154 3.4x 1.7x $300 49% 2013A 168.4 169.1
($40) $0 $90 $50 2014E $250 $115 1.4x 1.3x $300 62% 2014E 168.4 169.1
$76 $0 $0 $76 2015E $326 $190 1.7x 1.4x $300 37% 2015E 168.4 169.1
($19) ($12) ($72) ($18) ($122) ($10) $2 ($8) ($0.05) ($0.05) 2013A $19.68 $0.00 $1.06 $2.88 $15.74 $2.70 $1.70 $0.00 $11.34
($9) ($5) ($81) $0 ($94) $94 ($24) $71 $0.42 $0.42 2014E $26.71 $0.00 $1.55 $1.80 $23.37 $1.10 $0.56 $0.00 $21.70
($11) ($11) ($99) $0 ($121) $95 ($24) $71 $0.42 $0.42 2015E $25.23 $0.00 $1.58 $1.80 $21.85 $1.10 $1.14 $0.00 $19.61
Reserves (mmboe) 172.3 110.3 282.6
Net Risked Resource (mmboe) 49 223 218 211 920
BT PV@10% ($mm) $642.4 $368.4 $1,010.8 Value ($mm) $25.1 ($289.7) ($88.6) ($353.1) $657.7 BT PV@10% ($mm) 106 290 92 398 $886 $1,543.9
$NAV/ Share $3.54 $2.03 $5.57 $NAV/ Share $0.14 ($1.60) ($0.49) ($1.95) $3.62 $NAV/ Share $0.58 $1.60 $0.51 $2.19 $4.88 $8.51
25,000
Production (boe/d)
0.14 0.12 0.10 0.08 0.06 0.04 0.02 0.00 Production (boe/d) D.A Production/Share
20,000 15,000 10,000 5,000 0
$15.00 $10.00 $5.00 $0.00 2012A 2013A Cash Flow Netback Taxes G&A Royalties 2014E Interest Op costs 2015E
Source: GMP, company disclosures
27
Production per debt adjusted share
30,000
0.16
April 16, 2014
MANAGEMENT AND DIRECTORS

Advantage is led by Andy Mah, President and CEO. The company currently has 25 employees and management believes it can carry out its three Montney development programs without significantly adding additional employees. A summary of the management team is provided below and full biographies can be found in Appendix B. Senior Management Team Management
Andy J. Mah Craig Blackwood Neil Bokenfohr President & CEO VP, Finance & CFO Senior VP
Directors
Ronald A. McIntosh Stephen E Balog Paul G. Haggis Andy J. Mah
Source: Company disclosures
APPENDIX B: MANAGEMENT BIOGRAPHIES

Andy J. Mah President & CEO Mr. Mah has over 30 years of experience in the oil and gas industry. Prior to joining Advantage, Mr. Mah served as President of Ketch Resources Trust from September 2005 until June 2006 and was Chief Operating Officer from January to September 2005 . From August 1996 to January 2005, Mr. Mah was the Executive Officer and Vice President, Engineering and Operations of Northrock Resources Ltd. which became a wholly owned subsidiary of Unocal in 2002. Prior thereto, Mr. Mah had increasing managerial and technical positions with Sceptre Resources Ltd., and BP Canada. Mr. Mah has significant experience in the western Canadian Basin in all facets of the upstream oil and gas industry and worked on U.S. and international projects during his time with Unocal and BP Canada. Mr. Blackwood has been with Advantage since November 2004 and has been involved with capital markets, financial reporting and management, business processes and controls, oil and gas acquisitions, and taxation. Mr. Blackwood has over 20 years of experience and has worked in various financial roles with diverse experience throughout the resource sector including oil and gas producers, power producers and energy trading. Mr. Blackwood has a Bachelor of Commerce degree and is a Chartered Accountant. From January 2005 to June 2006, Mr. Bokenfohr was the Vice President, Exploitation and Operations of Ketch Resources Trust. Prior thereto, Mr. Bokenfohr served as Vice President, Engineering of Bear Creek (and Crossfield Gas Corp.) from March 2002 to January 2005. Mr. Bokenfohr has over 20 years of oil and gas experience in petroleum exploration, development and operations.
Craig Blackwood VP, Finance & CFO
Neil Bokenfohr Senior VP
Source: company disclosures
28
Aaron Swanson, CFA aswanson@gmpsecurities.com (403) 543-3563 April 16, 2014
Jordan McNiven jmcniven@gmpsecurities.com (403) 695-1401
Delphi Energy Corp

The Oracle of Bigstone
Rating Target Production 2014E (boe/d) 6:1 Production 2015E (boe/d) 6:1 CFPS 2014E (f.d.) CFPS 2015E (f.d.) SHARE DATA Shares o/s (mm, basic/f.d) 52-week high/low Market Capitalization (mm) Enterprise value (mm) Net debt (mm) - 2014E Projected Return Dividend Yield FINANCIAL DATA Oil and NGLs (b/d) Natural Gas (mmcf/d) Total (boe/d) 6:1 Equivalent growth WTI (US$/b) HHUB (US$/mmbtu) FX rate (USD/CAD) EPS (f.d.) CFPS (f.d.) Net debt (mm) Net Debt/CF VALUATION P/CF EV/DACF EV/boe/d EV/2P reserves (YE13) P/(2P) NAV P/Risked Upside NAV BUY $4.25 10,330 12,116 $0.44 $0.52
BUY
DEE-T Target $3.05 $4.25
153.3/167.6 $1.22/$3.05 $511 $654 $143 39% N/A
New completion method changes everything The move to a slickwater hybrid completion method and extended reach horizontal legs has been a game-changer for Delphis Montney project at East Bigstone. This has taken a marginally economic resource play and converted it into one of the most profitable liquids-rich Montney gas plays in Western Canada. Not only are the wells exhibiting much lower declines and higher initial volumes, but the higher associated gas production is resulting in condensate yields upwards of 100 bbls/mmcf. From an economic standpoint, the new wells pay out in ten percent of the time and carry an NPV in excess of $15 million. With these game-changing well results, we believe Delphis debt has peaked, netbacks are on the rise, and growth is accelerating. As a result, we wouldnt be surprised to see another upward revision to the companys 2014 production guidance. Focus on execution, not de-risking Delphis pointed focus at Bigstone has allowed the company to accelerate up the learning curve, perfecting its drilling and completion techniques while de-risking its land base. Over the past two years, the company has refined its completion method, extended its horizontal legs and de-risked a large portion of its 60+ sections of East Bigstone land. As a result, we see the East Bigstone asset as largely de-risked, meaning the company carries a much more attractive risk/return profile, as investors are now paying for execution, while carrying less reservoir risk. Guidance poised to increase on drilling efficiencies and well results Despite the company increasing guidance once already this year, we see room for it to move higher still. We believe the current guidance does not fully reflect the improved drilling efficiencies and recent well results. If the company can maintain performance throughout 2014, we see exit production exceeding 12,500 boe/d, up nearly 40% from exit 2013. Initiating coverage with a BUY rating and $4.25 target price We are initiating coverage of Delphi with a BUY rating and $4.25 target price as we feel the recent well results will drive a stronger production growth profile, a reduction in leverage, and increase in resource value. Our target is based on a combination of our $6.43 Risked NAV and a 7.5x times 2015 EV/DACF multiple.
29
2013A 2,223 36.1 8,241 0% $97.99 $3.73 $0.97 ($0.07) $0.22 $137.9 3.7x
2014E 3,043 43.7 10,330 25% $95.90 $4.50 $0.90 $0.03 $0.44 $142.8 2.0x
2015E 3,698 50.5 12,116 17% $95.00 $4.25 $0.90 $0.04 $0.52 $141.7 1.6x
6.2x 8.4x $45,096
7.0x 8.4x $63,310
5.9x 7.1x $53,885 $10.61 1.1x 0.5x
$5.00 $4.00
Close Price
DEE-T
20.0 16.0 12.0 8.0 4.0 .0

Volume (Millions)
$3.00 $2.00 $1.00 $0.00
May -13
Jul-13
Sep-13
Nov -13
Jan-14
Mar-14
April 16, 2014

1) New drilling and completion technique a game-changer for well economics 2) The five year plan: monetizing the Montney 3) Improved drilling efficiency and recent well performance could drive further guidance increases
1) New completion technique a game-changer for well economics

Early in 2013, Delphi switched the completion method on its Bigstone Montney wells, a change which was met with remarkable results. Data are available for eight Montney wells; the first 3 were completed with 20-stage gelled oil fracs, the fourth utilized a 20stage slickwater frac and wells 5 to 8 used a 30-stage slickwater frac. Slickwater fracs have increased the condensate yield by 2 to 3 times compared to the gelled fracs and, in addition, longer horizontal legs on recent wells have further increased production rates while adding royalty credits. Along with game-changing gas and condensate rates, the improved completions have come at a lower cost. At an average completion cost of $4.35 million, the 30-stage slickwater completions have come at a 5% discount to the gelled fracs at $4.58 million. Ultimately, its the economics were concerned about and the $15 million increase in NPV should turn some heads. The figures below compare cumulative production levels (both on a boe basis and a free condensate basis) for the 30-stage slickwater wells (blue lines), compared to the earlier wells (red lines). We also highlight our base type curve (green line), which falls in the middle of the old wells and new wells, along with our upside case, which utilizes a type curve based over the average of the new wells (also similar to the companys type curve). Its clear the new completion method is driving better production rates and more economic well results. 30-stage slickwater fracs vs. prior completion techniques and current type curve
80,000 70,000
Cumulative condensate (bbl)
60,000 50,000 40,000 30,000 20,000 10,000 1
30-stage slickwater Prior completion method Upside case type curve Base case type curve
Cumulative boe
350,000 300,000 250,000 200,000 150,000 100,000 50,000 -
30-stage slickwater Prior completion method Upside case type curve Base case type curve
5 6 Producing month
10
5 6 Producing month
10
Source: Company disclosures, GeoScout, GMP Securities
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April 16, 2014
Comparing Type curves (Old, Base case and Upside case)

Old (gelled frac) 1,124 342 1,080 $1.6 17% 53 Base Case 1,090 429 987 $13.7 166% 9 Upside Case 1,533 603 1,110 $16.6 347% 6
Well Perfromance
IP 30 (boe/d) IP 30 (bbl/d) EUR (mboe)

Economics
BT NPV (10) ROR (% ) Well Payout (months)
2) The five-year plan: monetizing the Montney

The path forward for Delphi is crystal clear Montney, Montney, Montney. Since discovering the zones potential at Bigstone, the other core areas have become sideshows, with the cash flow funding Montney development. With a clear focus and plenty of running room, the company has laid out a 5-year East Bigstone Montney development plan, calling for 51 wells from 2013 to 2017, for a capital outlay nearing $500 million. To test the economics of the plan and assess the value it may provide for shareholders, we have constructed a five year model mirroring the capital plans laid forth by the company, combined with our own type curve and pricing assumptions. For our analysis, we assume future wells produce in line with our base type curve, which lies roughly at the mid-point between the old wells and new wells. While this type curve appears conservative, given the production to date on the 30-stage slickwater wells, we believe this is a prudent approach until additional wells further validate a new type curve. However, to provide a glimpse of what the future may look like, should future wells continue to perform in line with the most recent ones, we also run a scenario using our upside case, which utilizes a type curve similar to the companys, representing the average of new wells drilled to date. Under our base type curve scenario, we estimate 2017 average Montney production of 15,000 boe/d, equal to a 52% compound annual growth rate with peak production of just under 20,000 boe/d. However, switching over to the upside type curve, we see Montney 2017 exit production of 25,000 boe/d and 2017 average production of 21,000 boe/d. Bigstone Montney GMP base case growth profile
20,000 2017 15,000 2016 2015 2014 2013
boe/d
10,000
5,000
0 Jan '13 Jul '13 Jan '14 Jul '14 Jan '15 Jul '15 Jan '16 Jul '16 Jan '17 Jul '17
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April 16, 2014
Bigstone Montney growth projections

25,000 20,000 15,000 Base type curve Upside type curve
boe/d
10,000 5,000 0
2013
2014
2015
2016
2017
While the upside type curve results in a significantly accelerated growth profile, the impact on economics is more striking and more important. According to our estimates, the upside type curve has a remarkable payout period of ~6 months and produces an NPV of 1.2x the base type curve. Transferring these results into the five-year plan, we find the upside type curve has the potential to deliver over $610 million in NPV and be self-funding by mid-2014. Montney development plan cash flow positive in 2015
$250 Capex $200 $150 $100 $50 $0 Net Cashflow
Millions
2013
2014
2015
2016
2017
East Bigstone development plan is fully funded Late in 2013, Delphi announced a funding plan that will enable the company to execute its five-year, 51 well, East Bigstone drilling plan, without the need for external equity. As part of the arrangement Delphi entered into a Gross Overriding Royalty (GOR) arrangement, which will partially fund the drilling of ten Montney wells through the middle of 2015. Under the agreement, the parties will contribute up to $25 million ($2.5 million per well) with a commitment for 7 wells through 2014 and an option on the first three wells in 2015, at which time the Montney project is expected to be cash flow positive and fully self-funded.
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April 16, 2014
3) Improved drilling efficiency and recent well performance could drive further guidance increases
In mid-March, Delphi increased average 2014 production guidance by 500 boe/d, to 10,00010,500 boe/d, and boosted its exit guidance by 1,000 boe/d to 11,50012,000 boe/d. Despite the increases, we continue to see further upside and potential for another guidance increase. Our conviction is primarily driven by improved drilling efficiencies and well timing, as Delphi continues to reduce drilling days and cycle times on its Montney wells. The companys current plans call for the completion of 6 wells prior to year-end, with drilling on the seventh beginning in 2014 and rolling over into 2015. We believe drilling efficiencies are improving to the point where the company should be in a position to bring all seven wells on-stream before the calendar turns over. Obviously bringing a well on at year-end will have a minimal impact to average production, but it should result in a significant increase to 2014 exit volumes and position the company even better for 2015. We also believe average production guidance does not fully reflect the new type curve, leaving room for a possible bump here as well.
VALUATION AND TARGET PRICE

Since the beginning of 2014, Delphi shares have significantly outperformed their peers, returning 57% versus the peer group at 33%, resulting in their relative valuation falling in line with their junior gas-weighted peers. Based on our 2014 estimates, Delphi trails the peer group by 21% on an EV/boe/d metric but trades in line on a P/CF and EV/DACF basis. We argue that despite a valuation that falls roughly in line with the peers, given its recent well results and current production levels, we see material upside to our 2014 estimates. Comparable valuations
Valuation
Production 2014E Company Name Ticker (boe/d) 22,065 13,500 9,600 1,429 10,908 18,194 6,354 12,926 4,708 5,988 3,837 10,330 9,600 8% Advantage Oil & Gas Ltd AAV Cequence Energy Ltd. CQE Crocotta Energy Inc. CTA Donnycreek Energy Corp DCK Kelt Exploration Ltd. KEL NuVista Energy Ltd. NVA Pine Cliff Energy PNE Painted Pony Petroleum Artek Exploration Ltd. Storm Resources Santonia Energy Ltd. Delphi Energy Corp. Median DEE vs Median PPY RTK SRX STE DEE % Gas 2014E (%) 99% 86% 73% 52% 72% 69% 95% 85% 63% 79% 81% 71% 73% -3% PPS Growth 2014E (%) 13% 31% 6% 336% 48% -12% 14% 47% 15% 14% -10% 25% 15% 59% D/CF 2014E (x) 1.4x 1.4x 1.4x 0.6x 0.0x 0.8x -1.0x 0.8x 2.1x 0.9x 1.2x 2.0x 0.9x 113% EV/DACF 2014E (x) 7.5x 7.5x 5.4x 7.9x 16.0x 10.0x 6.4x 11.8x 8.5x 13.7x 8.8x 8.4x 8.5x -2% 2015E (x) 6.9x 6.4x 4.7x 3.1x 11.4x 7.7x 7.5x 9.9x 6.5x 10.3x 9.9x 7.1x 7.5x -6% EV/boe/d 2014E $/boe/d $60,663 $57,248 $54,395 $91,047 $92,902 $91,005 $43,378 $90,859 $80,261 $109,053 $52,579 $63,310 80,261 -21% 2015E $/boe/d $52,123 $50,044 $47,134 $37,988 $109,693 $70,244 $43,245 $72,671 $69,045 $79,754 $55,960 $53,885 55,960 -4% 2014E (x) 5.8x 6.1x 3.9x 7.2x 15.5x 9.4x 7.3x 11.2x 6.7x 12.9x 8.0x 7.0x 7.3x -4% P/CF 2015E (x) 5.2x 5.0x 3.3x 2.7x 10.9x 7.2x 8.6x 8.5x 5.0x 9.7x 9.1x 5.9x 7.2x -19%
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April 16, 2014

Delphi recently released its 2013 reserve report showing total booked (2P) reserves of 61.7 mmboe weighted 73% to natural gas and representing 43% growth from 2012 levels. Of the 36.1 mmboe of total proved reserves on the books, over 40% are proved producing. Reflecting the increase in drilling and production from its liquidsrich Montney play at Bigstone, Delphis crude and NGL reserve weighting increased over 60% from 2012 levels and now sits at 16.8 mmboe. When looking at Future Development Capital (FDC), we estimate Delphi has 4.5x our estimated 2014 cash flow booked to its reserves with the 2P FDC roughly matching the companys five year Montney drilling plans. Based on our internally generated price deck, we estimate Delphis current 2P NAV is $2.57/share, backstopped by a 1P NAV of $1.62/share. Details of our Base NAV can be found in the Exhibit on the following page. Risked upside o Given Delphi is planning to direct the majority of its capital spending to its East Bigstone Montney play, this is the only asset we include as part of our Risked NAV. It is worth noting that we see potential upside on its Bigstone west acreage (over 100 locations identified and one well currently producing) but have not included it as part of our evaluation at this point. Before we get into respective risked upside value, it is worth reiterating our calculation methodology. The risked portion of the NAV utilizes our per well economics for Delphis unbooked inventory at East Bigstone, and develops this inventory under a capitally constrained scenario. On the current reserve report, Delphi has a total of 21 net Montney horizontals booked to its East Bigstone land position. Based on the 100-location inventory, we see 79 net locations falling into the unbooked category and thus being captured by our Risked NAV. Based on our analysis, we see an additional $647 million in unbooked value representing $3.86/share.
When we combine our Base NAV and Risked upside we calculate a Risked NAV for Delphi of $6.43 per share. Details of both our Base and Risked NAV can be found on the following page. Further to this, based on current trading levels, we believe roughly $80 million of unbooked value is captured in the current share price, representing five of the 79 unbooked locations.
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April 16, 2014

Assigned Reserves Proven Probable 2P Reserves Other Assets/Liabilities Land Value (220,000 acres @ $450 per acre) Net Debt Option Proceeds & Other Total 2P Net Asset Value Unbooked Upside Potential East Bigstone Gas (HZ) Total 2P NAV + Risked Upside Value $7.00 $6.00 $5.00 $4.00 Reserves (mmboe) 36.1 25.5 61.7 BT PV@10% ($mm) $289 $158 $447 Value ($mm) $99 ($138) $22 ($17) $430 $NAV/ Share $1.72 $0.94 $2.67 $NAV/ Share $0.59 ($0.82) $0.13 ($0.10) $2.57 $NAV/ Share $3.86 $3.86 $6.43
Net Locations 79 79
Net Risked Resource BT PV@10% (mmboe) ($mm) 131.7 $647 131.7 $647 $1,077
$/share
$3.00 $2.00 $1.00 $0.00

Proved 2P
Target price Current price

East Bigstone Gas (HZ)
Target price calculation Consistent with the target price methodology for the majority of our companies under coverage, we utilize a combination of our Risked NAV and a 2015 EV/DACF multiple. For Delphi, our $4.25 target price is based on a Risked NAV of $6.43 and a 2015 EV/DACF multiple of 7.5 times.
RISKS TO OUR THESIS

Reservoir variability: A key assumption of our five-year, 51-well plan is that the company will achieve similar production rates and condensate yields from each of the wells across its acreage. It is unlikely the reservoir is homogenous over such a large portion of land but we take faith in the fact that Delphi successfully drilled a southern Bigstone step-out location (13 kilometers south of its East Bigstone development) late in 2013, which showed similar test gas rates and a condensate yield of ~ 40 bbls/mmcf. While each individual well result is likely to vary around our type curve assumptions, we feel given the recent test rates and condensate yields, our type curve assumptions are conservative.
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April 16, 2014
Asset concentration: Based on our 5-year plan we estimate roughly 70% of corporate production will come from the companys East Bigstone core area by mid2015, suggesting the company does have a higher degree of production concentration risk. It is worth pointing out that the takeaway capacity risk is somewhat mitigated by the fact that Delphi has a number of large processing facilities in the area (KA SemCams, K3 SemCams, Saturn deep cut plant and the Talisman Edson facility) which provide the company with some optionality should one of the offsetting facilities run into some downtime issues (planned or otherwise). Delphi is also evaluating construction of its own major gas facility but this is not likely to happen until late 2015 or 2016. Commodity pricing: Despite our belief that Delphis East Bigstone wells remain economic in a much lower commodity price environment, we have to be aware that commodity pricing remains a key component in the development of its East Bigstone acreage. By our assumptions, the 5-year plan becomes self-funding by mid-2015, but should commodity prices significantly weaken (particularly condensate prices) this will have a negative impact on Delphis ability to develop the property without some form of additional external financing (or an additional GOR agreement).
COMPANY HISTORY AND OUTLOOK

Delphi came into existence through a June 2003 merger of DT Energy Ltd. and Rise Energy Ltd., with the merged company continuing under the name Delphi Energy Corp. The companys early focus was on natural gas in the Bigfoot area of northeastern B.C., with the Bigfoot assets later being swapped for light oil assets at Hythe, which the company continues to operate. The Hythe oil assets became an integral piece for Delphi, as the company began to put more emphasis on the pursuit of oil, following the natural gas price collapse in 2009; this also resulted in additional emphasis on Cardium oil development at its Bigstone property. In late 2009, the company acquired what would become its third core area at Wapiti, a liquids-rich gas play. While the Wapiti and Hythe assets continue to be core areas for the company today, it is the Bigstone assets which have become the hallmark of the company just not for the originally targeted Cardium potential. In 2012, Delphi underwent a fundamental change, with the Montney assets at Bigstone becoming the primary focus, with Hythe and Wapiti providing cash flow to further Montney development. In 2013, Montney production from Bigstone accounted for approximately 31% of production, with this share expected to increase to 60% in 2014. Delphi has grown production from ~6,300 boe/d in 2008 to ~8,200 boe/d in 2013, and is guiding 10,000 to 10,500 boe/d in 2014, representing 24% growth, year-on-year (based on the guidance mid-point). The company plans to drill 7 horizontal wells at Bigstone East in 2014, based on a capital spending program budget of $67 to $72 million, and is projecting cash flow of $60 to $65 million. We estimate the company will exit 2014 with net debt of $144 million, representing a trailing debt to cash flow ratio of 2.0x.
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April 16, 2014
CORE AREA OVERVIEW

Delphis operations are concentrated in west central Alberta, with core areas at Bigstone, Hythe, and Wapiti. With the companys focus squarely on Bigstone, all future development is expected to take place there, with the other two core areas providing cash flow to expedite the Montney development. As an aside, we would not be surprised to see the company divest Hythe or Wapiti, in order to fund an accelerated Bigstone development program. Delphi Energy core area map
Hythe Wapiti Bigstone
Bigstone the Montney growth driver The Bigstone assets were assembled through a combination of Crown land sales, acquisitions and farm-in agreements. The company held four legacy sections at Bigstone but took a larger entry into Bigstone West, acquiring 27 sections of land through provincial land sales in 2010 and 2011. After securing a toehold at Bigstone West, Delphi added 64.5 sections at Bigstone East through a series of acquisitions and farm-in agreements, the largest piece being a 30-section (26.7 net) acquisition in March of 2013. Bigstone South was added to the Delphi portfolio through a 32.5section farm-in completed in December, 2012. In 2013, 31% of corporate production came from Bigstone; this figure is expected to increase to 60% in 2014.
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April 16, 2014
DEE Bigstone map
West Bigstone
East Bigstone - focus area of 5 year development plan
West Bigstone well - cumm production of 97 mmcf and 11.9 mbbl of C5+
South Bigstone
Exploration well tested at 957 boe/d with 42 bbls/mmcf of C5+
East Bigstone development to date Since 2012, Delphi has placed ten wells on production at its East Bigstone play (three wells in 2012, six wells in 2013 and one thus far in 2014). As previously discussed, the drilling and completion methods have significantly changed over the life cycle of the play. The company has gone from 20-stage conventional gelled oil fracs to a new 30stage slickwater hybrid frac, which has been met with significantly better results. To date, we estimate the company has de-risked over 20 net sections of land in the area. East Bigstone chronological development
2012 2013 2014 (drilled / licensed)
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April 16, 2014
A tale of two completion methods The best comparison of the positive impact of Delphis new completion technique vs. the old one can be found in the two offsetting wells in section 19, in the northeast portion of the Bigstone land base. The 16-30 well was completed with the old method (gelled oil, 20 stages), while the offsetting 15-30 was completed with the new method (slickwater hybrid, 30 stages). What can be seen from the production profile (below) is the new completion method has yielded twice the amount of condensate on the back of a higher gas production rate. This essentially isolates the impact of the completion method on the well results. Comparing gelled oil and the slickwater completed production profiles
160,000 140,000
Cumulative Production
120,000 100,000 80,000 60,000 40,000 20,000 0 1 2 3 4 Months on Production 5 6
16-30 (cum. Boe) 15-30 (cum boe)
16-30 (cum. C5+) 15-30 (cum. C5+)
Economics comparing our base case and upside case While we have not based our East Bigstone development value on the upside case type curve, given the recent well results have trended towards this upside curve, we feel its prudent to highlight the economics. Base case and Upside case comparative economics
1,600 1,400
Risked Production (boe/d)
630
Cumulative Production (mboe)
1,800 1,600
810 630 540 450 360 270 180 90 1 6 11 16 21 26 31 36 Months on production Production (boe/d) 41 46 51 56 61 0
1,200 1,000 800 600 400 200 0 1 6 11 16 21
450 360 270 180 90 26 31 36 Months on production Production (boe/d) 41 46 51 56 61 0
1,400 1,200 1,000 800 600 400 200 0
Oil (bbls/d)
Assumptions Well Cost ($mm) $9.2 IP 30 (boe/d) 1,090 IP 30 (bbl/d) EUR (mboe) EUR (mbbl) 429 987 360
Cumulative (mbe)
Oil (bbls/d)
Assumptions Well Cost ($mm) $9.2 IP 30 (boe/d) IP 30 (bbl/d) EUR (mboe) EUR (mbbl) 1,533 603 1,110 405
Cumulative (mboe)
Risked Economics BT NPV (10) $13.7 ROR (% ) 166% Well Payout (months) Half Cycle F&D ($/boe) Recycle Ratio (times) 9 $8.81 3.9x
Risked Economics BT NPV (10) $16.6 ROR (% ) Well Payout (months) Half Cycle F&D ($/boe) Recycle Ratio (times) 347% 6 $8.18 4.0x
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Risked payout
540
Risked payout
720
April 16, 2014

Base Case Upside Case
Well Perfromance
Change 41% 41% 13% 21% 109% -33%

Economics
1,090 429 987 $13.7 166% 9
1,533 603 1,110 $16.6 347% 6
As shown above, our East Bigstone base case type curve has a risked IP 30 of 1,090 boe/d and pays out in nine months. It is this base case well that we use for our Risked NAV and five-year plan development scenario. This base case well sits roughly in the middle of Delphis original completion method wells and the new completion wells; as such, we feel it represents a very conservative estimate of go-forward economics. Over time, as the company completes more wells under the new completion method, we are likely to see our base case type curve scenario move towards the upside case, which will result in a significant improvement in NPV, rate of return, and payout.
CONCLUSION
We are initiating coverage of Delphi Energy with a BUY rating and $4.25 target price as we believe the recent well results from the companys East Bigstone Montney play are, and will continue to be, a game-changer for the company. Not only do we see material long-term resource upside potential on the property, we see short-term upside in the form of balance sheet improvements, better capital efficiencies, and a potentially higher exit rate. We like the fact that Delphi has captured the resource, has moved up the learning curve on well completion methodology and is now focused on execution.
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April 16, 2014
APPENDIX A: DELPHI ENERGY OPERATING AND FINANCIAL INFORMATION

Delphi Energy
DEE-TSX Rating Price Target Total Return BUY $4.25 39% Aaron Swanson, CFA - (403) 543-3563 aswanson@gmpsecurities.com Jordan McNiven - (403) 695-1401 jmcniven@gmpsecurities.com 2013A $2.57 $6.43 6.2x 8.4x $45,096 $10.28 $6.03 11.0 18.8 0.03 2013E ($8.8) $46.0 $37.2 $0.24 $0.22 2014E ----7.0x 8.4x $63,310 --------0.05 2014E $7.1 $66.1 $73.1 $0.48 $0.44 2015E ----5.9x 7.1x $53,885 --------0.06 2015E $9.2 $77.9 $87.1 $0.57 $0.52
Company Overview Price as of 04/14/14 52 week High - Low Fully Diluted Shares Outstanding Market Capitalization 2014E Net Debt Convertible Debentures Enterprise Value Commodity Price Assumptions WTI (US$/bbl) Edmonton Par (C$/bbl) WCS (C$/bbl) Nymex (US$/mcf) AECO (C$/mcf) Exchange Rate (US$/C$) Realized Prices Crude Oil (C$/bbl) NGL (C$/bbl) Natural Gas (C$/mcf) Production Hedged (%) Daily Production Crude Oil (bbl/d) NGL (bbl/d) Heavy (bbl/d) Total Liquids (bbl/d) Natural Gas (mmcf/d) Total Production (boe/d) YoY Production Change Income Statement ($MM) Oil & Gas Revenue Hedging Gains/(Losses) Gross revenue Royalties Operating Transportation Net Operating Income Expenses G&A Interest DD&A Other Total Expenses Earnings Before Tax Income Tax (Recovery) Net Income EPS (basic) EPS (diluted) Corporate Netback ($/boe) Revenue Royalties Opex Field Netback G&A Interest Expense Cash Taxes and Other Hedging Cash Flow Netback $50.00 $45.00 $35.00 $30.00
$/boe
$3.05 $3.14 - $1.17 167.6 $511.2 $142.8 $0.0 $654.0 2014E $95.90 $99.23 $85.60 $4.50 $4.63 $0.90 2014E $94.89 $53.89 $4.80 47% 2014E 1,593 1,450 0 3,043 43.7 10,330 25% 2014E $164.0 ($8.3) $155.7 $24.6 $33.9 $12.3 $84.9 2015E $95.00 $97.78 $87.78 $4.25 $4.06 $0.90 2015E $93.78 $52.78 $4.42 20% 2015E 2,022 1,676 0 3,698 50.5 12,116 17% 2015E $182.9 ($5.5) $177.4 $25.6 $38.7 $13.9 $99.2
2013E $97.99 $93.44 $78.01 $3.73 $3.17 $0.97 2013E $88.41 $48.25 $3.54 13% 2013E 1,002 1,221 0 2,223 36.1 8,241 (0% ) 2013E $100.3 ($1.0) $99.3 $13.2 $25.5 $10.6 $50.0
Key Valuation Ratios Base Net Asset Value ($/share) Risked Net Asset Value ($/share) P/CF (x) EV/DACF (x) EV/Production ($/boe/d) EV/1P Reserves ($/boe) EV/2P Reserves ($/boe) 1P RLI (years) 2P RLI (years) DA Production per Share (boe/d) Cash Flow Statement ($Mm) Operating Activities Net Income Non-Cash Items CF from Operations (Adj.) CFPS (basic) CFPS (diluted) Investing Activities Exploration and Development Net Acquisitions Reclamation Fund/Other CF from Investing Financing Activities Change in Total Debt Shares Issued Dividends/Other CF from Financing Activity Leverage Net Debt Total Debt Net Debt-CF Total Debt-CF Credit Facility % Utilized Shares Outstanding ($Mm) WA Outstanding Shares (basic) WA Outstanding Shares (diluted) GMP Net Asset Value 2013 YE Assigned Reserves Proven Probable 2P Reserves Other Assets/Liabilities Land Value Net Debt Option Proceeds & Other Total 2P Net Asset Value Unbooked Upside Potential East Bigstone Gas (HZ) Total
($72.0) ($10.3) $0.0 ($82.3)
($78.0) $0.0 $0.0 ($78.0)
($86.0) $0.0 $0.0 ($86.0)
$35.5 $0.1 ($1.6) $34.0 2013E $137.9 $137.9 3.7x 3.7x $160.0 86% 2013E 153.1 166.6
$4.9 $0.0 $0.0 $4.9 2014E $142.8 $142.8 2.0x 2.0x $160.0 89% 2014E 153.3 166.6
($1.1) $0.0 $0.0 ($1.1) 2015E $141.7 $141.7 1.6x 1.6x $160.0 89% 2015E 153.3 167.6
$6.2 $7.2 $51.3 ($2.3) $62.5 ($12.5) ($3.7) ($8.8) ($0.08) ($0.07) 2013E $33.39 $4.37 $12.01 $17.01 $2.06 $2.41 $0.00 $0.22 $12.54
$6.6 $5.2 $64.1 $0.0 $75.9 $9.0 $2.0 $7.1 $0.03 $0.03 2014E $43.49 $6.52 $12.25 $24.72 $1.75 $1.37 $0.00 ($2.20) $21.59
$6.6 $5.4 $75.2 $0.0 $87.2 $12.0 $2.8 $9.2 $0.04 $0.04 2015E $41.36 $5.79 $11.90 $23.67 $1.50 $1.23 $0.00 ($1.24) $20.94
Reserves (mmboe) 36.1 25.5 61.7
Net Locations 79 79
Net Risked Resource (mmboe) 97.4 97.4
BT PV@10% ($mm) $288.5 $158.1 $446.7 Value ($mm) $98.9 ($137.9) $22.4 ($16.6) $430.1 BT PV@10% ($mm) $647 $647 $1,077
$NAV/ Share $1.72 $0.94 $2.67 $NAV/ Share $0.59 ($0.82) $0.13 ($0.10) $2.57 $NAV/ Share $3.86 $3.86 $6.43
14,000 12,000
Production (boe/d)
0.08 0.06 0.05 0.04 0.02 0.01 0.00

Production per share
$40.00
0.07
10,000 8,000 6,000 4,000 2,000 0
$25.00 $20.00 $15.00 $10.00 $5.00 $0.00 2013e

Cash Fl ow N etba ck Ta xe s Intere st
2014e
G&A Royal tie s Op costs
2015e
Production Op erati ng Netb ack Production per Sh are
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April 16, 2014

Senior Executives and Board Members Biographies Management David Reid, President & CEO Brian Kohlhammer, VP, CFO Tony Angelidas, VP, Exploration Rod Hume, VP, Engineering Former President & CEO of DT Energy, Renata Resources and COO of Ballistic Energy Professional engineer with over 28 years of experience Formerly VP & CFO at Virtus Energy and Renata Resources Chartered accountant with over 23 years experience in the oil and gas industry Former VP Exploration of DT Energy, Renata Resources and Prize Energy Professional geologist with over 27 years of experience Formerly with Dominion Exploration Canada, Devon Canada and Anderson Exploration Professional engineer with over 15 years of experience
Hugo Batteke, VP, Operations Mike Galvin, VP, Land Board of Directors Dave Reid Tony Angelidas Harry Campbell, Q.C. Robert Lehodey, Q.C Andrew Osis Lamont Tolley David Sandmeyer Stephen Mulherin
Over 25 years experience in the oil and gas industry Extensive experience in Delphi's major operating areas in Alberta and British Columbia Formerly with Rockyview Energy and Nexen Land negotiator with over 15 years experience
See above See above Chairman, Burnet, Duckworth & Palmer LLP Partner, Osler, Hoskin & Harcourt LLP Independent Businessman Independent Businessman Director of Freehold Royalties Ltd. Partner, Polar Capital Corporation and serves on the Board of Fort Chicago Energy Partners and Lockerbie & Hole Inc.
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Donnycreek Energy Inc.8

Doubling down at Kakwa
BUY
DCK-V Target $2.04 $3.00
54.7/58.6 $3.11/$1.67 $120 $130 $10 47% N/A
2013A 110 0.7 231 577% $97.99 $3.73 $0.97 ($0.03) $0.06 ($27.8) -11.9x
2014E 684 4.5 1,429 518% $95.90 $4.50 $0.90 $0.07 $0.29 $10.4 0.6x
2015E 1,919 10.8 3,726 161% $95.00 $4.25 $0.90 $0.16 $0.74 $21.9 0.5x
36.2x 36.0x $375,827
7.2x 7.9x $91,047
2.7x 3.1x $37,988 $12.16 0.7x 0.5x
$4.00
DCK-V
16.0
$3.00
Close Price
12.0
Volume (Millions)
$2.00
8.0
$1.00
4.0
$0.00
May -13
Jul-13
Sep-13
Nov -13
Jan-14
Mar-14
.0
Double down: Two Montney layers make Kakwa a potential cash cow With the IP30 rates from the companys first seven Kakwa wells averaging 3.0 mmcf/d and 150 bbl/mmcf of free condensate, Donnycreeks 19section land block already looked like a piece of prime real estate. However, their eighth and most recent well takes things to the next level. Of the first seven wells, six were drilled in the northern portion of the land block and targeted the middle Montney, with the remaining well producing from the upper Montney in the southern portion of the land base. The eighth well was the second well drilled into the upper Montney but lies approximately five sections northeast of the other producing upper Montney well. The eighth well posted an impressive test rate of 2.7 mcf/d and 621 bbl/d over the final day of flowback, but more importantly, significantly de-risked the upper Montney, with the potential to double the companys inventory. Exploration upside at Wapiti hits short-term hiccup The company holds a significant amount of exploration upside, with 328 gross sections (75% W.I.) of undeveloped land at Wapiti. However, the potential here was dealt a couple of blows recently as the first well drilled in the area had to be shut in due to high hydrogen sulphide content and, when tested, recovered no free condensate. Given the size of the land position, it would be unfair to write off the Wapiti based on a single result, however, the risk profile has increased considerably. Rightfully so, in our view, the market is currently ascribing no value to this land base. Proven salesmen: Management is builders, not developers Donnycreeks management team has a lengthy track record of acquiring prospective land, de-risking plays and ultimately setting the companies up for acquisition. We expect management will take much of the same approach with Donnycreek, as the company has successfully de-risked the middle Montney at Kakwa, has taken large steps towards doing the same with the upper Montney, while the fate of Wapiti remains up in the air. As more land is de-risked the take-out value of the company should rise. Initiating coverage with a BUY rating and $3.00 target price We are initiating coverage of Donnycreek with a BUY rating and $3.00 target price. Our target is based on a combination of our Risked NAV and a 3.5 times 2015 EV/DACF multiple.
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April 16, 2014

1) Kakwa Montney driving near term production and cash flow growth 2) Exploration upside at Wapiti 3) Proven salesmen a team of builders, not developers
1) Doubling down: Two proven Montney layers make Kakwa a potential cash cow
In the near term, Donnycreeks growth is expected to come from their Montney project in the liquids rich area of Kakwa, Alberta. Kakwa has proven to be, arguably, the most liquids rich region of the Montney making it one of the hottest areas in the basin. Donnycreeks drilling to date has focused almost exclusively on the middle Montney but a recent successful test result out of the upper Montney, potentially doubles the drilling inventory and makes an already attractive land base that much better. To date, the company has completed 8 gross wells. Seven are on the northern portion of the land block and target the middle Montney, with the remaining producer targeting the upper Montney on the southern portion of the land base. Given the company has participated in 8 successful wells on their acreage, we believe the northern part of their land base has been largely de-risked presenting the ability to provide stable cash flow and production growth in the near term. At the close of 2013, the company had production tested 5 (2.8 net) wells at Kakwa, a sixth was tested early in 2014 and their seventh well began producing in mid-February. However, its well 8 that truly grabbed our attention. The significance of well 8 is that it targets the upper Montney on the northern part of the block. Prior to this well, the only well producing from the upper Montney was located 5 sections to the southwest. The successful upper Montney test in the north significantly derisks the upper Montney, effectively doubling the companys potential drilling inventory. With drilling of the 8th well complete, the company plans to begin drilling the first well of a 3-well pad located on section 19. Kakwa Middle and Upper Montney production
# #
Upper Montney well Middle Montney well DCK 23.65% WI DCK 50% WI DCK well/license DCK 23.65% WI DCK well/license
DCK 50% WI
2 8 6 3 5 1 7
Next three wells planned for section
Source: GeoScout, Company disclosures, GMP
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April 16, 2014
Our Kakwa type curve calls for an IP30 gas rate of 2.7 mmcf/d and a free condensate rate of 150 bbl/mmcf. Our forecast liquids yield declines over time and average out to 125bbls/mmcf over the life of the well. To date, cumulative production profiles are performing in line with type curve expectations although it should be noted that sufficient production data are currently limited to 3 wells. Producing day rates for all 3 wells have come in well ahead of our type curve rates, particularly at the front end of the curve, but production has been constrained due to high pipeline pressures. Kawka well performance vs. type curve
5,000 4,500 13-17 14-30 GMP type curve
350
Condensate yeild (bbls/mmcf)
Producing day rates (mmcf/d)
4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 1 2 3 4 5 6 7 Producing month 8
03-19
300 250 200 150 100 50
'13-17 '14-30 '03-19 GMP Type curve
10
11
Source: GeoScout, GMP Securities
6 7 8 Production month
10
11
12
13
From an economic perspective, the liquids rates are more important than the gas rates and exhibit a high degree of variability as seen in the figure below. At our type curve assumptions and current long-term price deck ($3.68/mcf AECO; $105/bbl condensate) we calculate a per-well NPV of $10.9 million. Whats more impressive is our type well returns a positive NPV on the condensate volumes alone with no value ascribed to the gas. With condensate driving the economics, we believe it adds significant stability to cash flow as gas prices have recently proven to be much more volatile than condensate. Kakwa IP rates and free condensate yields
5,000 4,500 4,000 0 2 4 IP 30 IP60 6 IP90 8 10 Condensate yield 12 14 300 270
Gas rate (mmcf/d)
3,500 3,000 2,500 2,000 1,500 1,000 500 0 13-17 03-19 14-30 14-02 05-23 16-25 16-17
210 180 150 120 90 60 30 0
45
Condensate yield (bbl/mmcf)
240
April 16, 2014
2)
Exploration upside at Wapiti hits a short-term hiccup
In contrast to Donnycreeks Kakwa land, which is moving into the development stage, their land position at Wapiti is still in the very early exploration stage. The company holds a 75% working interest on 328 gross sections of undeveloped Wapiti land. The large swath of land lies just to the west of the current Montney producers providing it with speculative upside to an expanding Montney trend. With only a few producing Montney wells within a township of Donnycreeks property, the land comes with considerable risk, but given the size of the land position, success at Wapiti would be a game changer for the company. Upside is present but so is hydrogen sulphide Donnycreek completed drilling their first Wapiti well (1-26; red star on the following map) during the first week of 2014. The well utilized a previously drilled vertical well which was re-entered and taken horizontally. On March 4, 2014, the company provided an update on the well, stating the hydrogen sulphide content of the gas was measured at 8% during flowback, which exceeds the level allowed under flaring regulations. As a result, the company discontinued testing on the well and temporarily shut it in until a permit was acquired to flare the gas. The test results were expected to be a key data point for the company as a positive result would significantly reduce the risk profile for the play. The absence of test results, combined with potential cost escalations required to treat the gas, caused the share price to fall 15% on the day. Ultimately, the company was able to acquire a flaring permit and released test results at the end of March. Again, the inherent risks of exploration drilling showed their ugly side, as the well produced at a rate of 1.7 mmcf/d over a 48-hour period with no free condensate recovered.
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April 16, 2014
Wapiti land position and area Montney wells

DCK land Sinopec land NVA land Montney well 1-26 well
IP30: 4.3 mcf/d 56 bbls
Source: GeoScout, GMP Securities
The companys original plan was to follow up the 1-26 well with a second well in the central part of the play. However, given the disappointing result on the pilot well, the company now plans to move forward with a more cautious approach. Rather than drill another horizontal well, Donnycreek plans to re-enter existing vertical wells and deepen them to the Montney formation to test for hydrogen sulphide and liquids. This approach will reduce all-in costs to approximately $4 million, less than half the $10 million bill for the 1-26 well. Additionally, the company believes hydrogen sulphide is not present in the Montney and that its presence was the result of fracs extending into the shallower Doig phosphate zone. However, our larger hang-up is in the liquids content, as ultimately the ability to recover condensate will determine the viability of Wapiti. While there is certainly considerable uncertainty at Wapiti, whats key to note is that no value is being ascribed for the play. Donnycreek currently trades at a 25% discount to our Base NAV, which is based strictly on Kakwa. Further, our Base NAV currently only assigns value for the middle Montney. What this means is we believe there is plenty of upside left in this name even without success at Wapiti.
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April 16, 2014
3) Builders, not developers

Donnycreeks management team has a lengthy history of building energy companies and setting them up as acquisition targets. Malcolm Todd, President & CEO of Donnycreek, was previously President of Prairie Exploration (private) and Prairie Pacific Energy (public), which were sold to Donnybrook Energy and Northrock Resources, respectively. Similarly, Murray Scalf, Executive VP and Director of Donnycreek, was previously President of Dorado Energy, Denim Exploration Corp., Denim Energy Inc., and Dorchester Energy Inc. Dorchester Energy had a distinct Donnycreek presence, as three other members of the current Donnycreek board or senior management team were with Dorchester. Mr. Scalf was President of Dorchester from May 1998 through to the sale of the company in 2002, during which time the share price increased from $0.10/share to the companys sale price at $0.80/share, good for a CAGR of 35%. The other two publically traded companies with a significant Donnycreek presence were Prairie Pacific Energy Corp. and Kootenay Energy Inc. Malcolm Todd was at the helm of Prairie Pacific as President and during his tenure the share price increased by more than a factor of five; Murray Scalf also served as a director for Prairie Pacific. Kootenay Energy was led by current Donnycreek COO, Jack Marsh, and during his tenure the share price appreciated at a CAGR of approximately 9%. It is also worth noting that at the time of sale all 3 of these companies were producing under 1,000 boe/d. This suggests to us that the strength of this management team is in acquiring prospective land packages and de-risking them. Given this, it wouldnt surprise us to see this group target a sale of the company following further de-risking of their land base. Share price performance of managements prior public companies
700% 600% 500% Dorchester Energy (1998-2002) Prairie Pacific Energy Corp. (2003-2006) Kootenay Energy Inc. (2005-2008)
Total return
400% 300% 200% 100% 0% -100%
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April 16, 2014

Prior to the release of the most recent operational update, where the company announced testing on their Montney well at Wapiti would be delayed due to hydrogen sulphide content, the stock was up 21% on the year. Given the companys relative size to its gas weighted peers, it should come as no surprise the company possesses a higher per share growth rate, ultimately driving the lowest relative 2015 valuation. Donnycreek is currently backstopped by a strong balance sheet that is set to help fund their 2014 capital program, positioning the company to bring on 6 wells, including the initial de-risking of their Western Kakwa acreage. Comparable Valuations
Production 2014E Company Name Cequence Energy Ltd. Painted Pony Petroleum Kelt Exploration Ltd. Crocotta Energy Inc. Pine Cliff Energy Storm Resources Artek Exploration Ltd. Santonia Energy Ltd. NuVista Energy Ltd. Delphi Energy Corp. Ticker CQE PPY KEL CTA PNE SRX RTK STE NVA DEE (boe/d) 22,065 13,500 12,926 10,908 9,600 6,354 5,988 4,708 3,837 18,194 10,330 1,429 9,600 -85% Advantage Oil & Gas Ltd AAV % Gas 2014E (%) 99% 86% 85% 72% 73% 95% 79% 63% 81% 69% 71% 52% 73% -29% PPS Growth 2014E (%) 13% 31% 47% 48% 6% 14% 14% 15% -10% -12% 25% 336% 15% 2073% D/CF 2014E (x) 1.4x 1.4x 0.8x 0.0x 1.4x -1.0x 0.9x 2.1x 1.2x 0.8x 2.0x 0.6x 0.9x -30% EV/DACF 2014E (x) 7.5x 7.5x 11.8x 16.0x 5.4x 6.4x 13.7x 8.5x 8.8x 10.0x 8.4x 7.9x 8.5x -7% 2015E (x) 6.9x 6.4x 9.9x 11.4x 4.7x 7.5x 10.3x 6.5x 9.9x 7.7x 7.1x 3.1x 7.5x -58%
Valuation
EV/boe/d 2014E $/boe/d $60,663 $57,248 $90,859 $92,902 $54,395 $43,378 $109,053 $80,261 $52,579 $91,005 $63,310 $91,047 80,261 13% 2015E $/boe/d $52,123 $50,044 $72,671 $109,693 $47,134 $43,245 $79,754 $69,045 $55,960 $70,244 $53,885 $37,988 55,960 -32% 2014E (x) 5.8x 6.1x 11.2x 15.5x 3.9x 7.3x 12.9x 6.7x 8.0x 9.4x 7.0x 7.2x 7.3x -2% P/CF 2015E (x) 5.2x 5.0x 8.5x 10.9x 3.3x 8.6x 9.7x 5.0x 9.1x 7.2x 5.9x 2.7x 7.2x -62%
Donnycreek Energy Cor DCK Median DCK vs Median

Donnycreeks fiscal 2013 (fiscal year ends July 31) reserve report shows total booked (2P) reserves of 10.7 mmboe weighted 52% to natural gas. Only 8% of 2P reserves are classified as proved producing reflecting the largely undeveloped nature of the land base. On their most recent reserve report, Donnycreek had recorded $99.5 million in 2P Future Development Costs (FDC) representing roughly 2x the calendar 2014 spending plans. Relative to their 2013 cash flow, this FDC looks to be high, but given the company is in an aggressive growth phase we do not feel their booked non-producing reserves result in an overly aggressive reserve report. Based on our internally generated price deck, we estimate a 2P NAV of $2.83/share for Donnycreek meaning the company is currently trading at a 28% discount to their 2P NAV. Details of our Base NAV can be found in the Exhibit on the following page. Risked Upside o While we note Donnycreek potentially has a material amount of resource potential on their Wapiti acreage, given we have yet to see any meaningful production results from this acreage, we have not included it in our unbooked upside analysis. For our unbooked upside we have limited our
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April 16, 2014
unbooked locations to the companys Kakwa acreage in the middle Montney. o On the current reserve report Donnycreek has a total of 23 gross Montney horizontals booked to their Kakwa land position, of which three are classified as proved producing. Based on the company owning roughly 8 net sections of land and our assumption the land can be developed at 4 wells per section, we see 10 net locations falling into the unbooked category and thus being captured by our Risked NAV. Based on our analysis, we see an additional $90 million in unbooked value representing $1.54/share.
When we combine our Base NAV and Risked upside we calculate a Risked NAV for Donnycreek of $4.37 per share. Details of both our Base and Risked NAV can be found below.
NAV Breakdown
2013 Assigned Reserves Proven Probable 2P Reserves Other Assets/Liabilities Land Value (80,179 acres @ $450 per acre) Net Debt (cash is positive) Option Proceeds & Other Total 2P Net Asset Value Unbooked Upside Potential Kakwa Middle Montney Gas (Hz) Wapiti Montney Gas Total 2P NAV + Risked Upside Value $5.00 $4.00 $3.00 Reserves (mmboe) 2.8 7.9 10.7 BT PV@10% ($mm) $29 $71 $100 Value ($mm) $24 $28 $5 $57 $157 $NAV/ Share $0.52 $1.28 $1.80 $NAV/ Share $0.43 $0.50 $0.10 $1.03 $2.83 $NAV/ Share $1.54 N/A $1.54 $4.37
Net Locations 10 N/A 10
Net Risked Resource BT PV@10% (mmboe) ($mm) 8.8 $90 N/A N/A 8.8 $90 $247
$/share
$2.00 $1.00 $0.00

Proved 2P Kakwa Middle Montney Gas (Hz) Wapiti Montney Gas
50
April 16, 2014
Target price calculation Consistent with the target price methodology for the majority of our companies under coverage, we utilize a combination of our Risked NAV and a 2015 EV/DACF multiple. For Donnycreek, our $3.00 target price is based on a Risked NAV of $4.37 and a 2015 EV/DACF multiple of 3.5 times. This target multiple is below the average for the group and we feel this is justified given: 1) Donnycreek is a relatively smaller company when compared to its peers, 2) the company carries relatively more exploration risk, and 3) the companys main producing asset is non-operated.
RISKS TO OUR THESIS

Unsettled lawsuit related to Donnycreek spinoff from Donnybrook Donnycreek faces a proposed class action lawsuit relating to the plan of arrangement that saw Donnybrook transfer its non-core assets to Donnycreek. A statement of claim has been filed with the Alberta Court of Queens Bench. The statement of claim alleges that shareholders of Donnybrook were misled regarding the true value of the assets being transferred to Donnycreek. Amongst other things, the lawsuit seeks $20 million in general damages and $10 million in punitive damages. Capital intense, non-operated Kakwa wells: Donnycreeks 19 sections of land in the greater Kakwa area are non-operated meaning the company is not in full control of their destiny. We acknowledge the fact Donnycreeks partner and well operator, Contact Exploration, has done very well executing the Kakwa drilling program as drilling times have been reduced by one-third over the life of the seven wells brought on production. Drilling and completion costs have also trended downwards. We believe there is an aspect of financial risk given Donnycreeks partners are all considered small cap companies, which may have limited access to capital should a capital needs situation arise. Asset concentration: 100% of Donnycreeks production is from their Kakwa assets meaning the company is carrying a high degree of asset concentration risk. The company did construct (50% working interest) a compression and condensate recovery facility that will help alleviate operating pressures but given the expected production growth from the area there is a possibility takeaway capacity on the Pembina wet gas pipeline becomes constrained. There are a number of facility and infrastructure expansion projects approved and/or under construction for the area, which will assist with long term takeaway capacity, but again we may see some volume constraint issues in the near term.
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April 16, 2014

Donnycreek Energy arose as a spin-off from Donnybrook Energy in November of 2011. The spin-off assets included properties in the Deep Basin area of WestCentral Alberta and Delia-Michichi assets in Central Alberta. In October 2012, Donnycreek materially expanded its land position through an asset purchase with Deventa Land Corp. Donnycreek acquired 169.5 gross (115.5 net) sections of undeveloped land in the Deep Basin. The acquisition included 75% working interest on 136.5 gross sections of land at Wapiti and 35 gross sections of 40% working interest land at Chicken; these assets remain key focus areas for the company. For calendar 2014, Donnycreek is planning on a $52.2 million capital program ($49.1 million for drilling and completions, $3.1 million for equip and tie-in costs) that will see the company participate in 8 (4.0 net) wells at Kakwa and direct a small amount of capital to Wapiti, in an effort to further de-risk the play. Production guidance is calling for 2014 average production of 1,700 boe/d (49% condensate) with exit volumes of 2,500 boe/d. Through the year, the company anticipates bringing on 3 (1.5 net) wells in Q1, 2 (1.0 net) wells in Q2, 2 (1.0 net) wells early in Q3 and 2 (1.0 net) wells late in the year. The budget does not include any production from the companys Wapiti Montney wells.
CORE AREA OVERVIEW

Donnycreeks operations are highly concentrated in West Central Alberta along the greater Montney trend which extends into northeastern B.C. Operations to date have been primarily focused at Kakwa, arguably one of the hottest liquids rich Montney gas plays in Western Canada, where Donnycreek has 19 sections (8 net) of land and has participated in the drilling of 8 wells. Beyond Kakwa, Donnycreek is in the early stages of testing their Montney acreage at Wapiti, previously discussed, and also possess 35 (14 net) sections of prospective Montney rights at Chicken, however, we do not expect them to deploy any capital to Chicken in the near term. For our core area review we focus on Donnycreeks operations and potential at Kakwa and Wapiti.
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April 16, 2014
Donnycreek Core area map
Wapiti
Kakwa
Chicken
Kakwa Active area for liquids rich Montney From an industry activity standpoint, the liquids rich Montney play at Kakwa is, arguably, one of the hottest plays in Western Canada. Offsetting the Donnycreek/Contact Exploration acreage are both Paramount Resources and Seven Generations Energy, two well capitalized active Montney players. Donnycreek holds 19 gross sections (~8 net) at Kakwa, where the northwest portion of the land base is largely de-risked and moving into the development stage. To date, the company has completed 8 gross wells, spanning 6 sections of land, primarily in the northern portion of the property. With a stated goal of proving up the remaining Kakwa land, we expect the company will give the southwest portion of the play additional attention in 2014.
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April 16, 2014
Kakwa area map active operators offsetting
DCK Land (50%) DCK Land (23%) Seven Gens Land POU Land DCK Wells Seven Gens Wells POU Wells
Results to date While the gas rates on Donnycreeks Kakwa wells may not be eye-popping on their own, the high condensate yields make the economics very compelling. The seven producing wells with available data have averaged IP30 free condensates yields in excess of 150 bbl/mmcf, with an average gas rate of 3.0 mmcf/d. Donnycreek Kakwa map with chronological well events
# #
Upper Montney well Middle Montney well DCK 23.65% WI DCK 50% WI DCK well/license DCK 23.65% WI DCK well/license
DCK 50% WI
2 8 6 3 5 1
IP30 IP60 IP90 mmcf/d bbl/mmcf mmcf/d bbl/mmcf mmcf/d bbl/mmcf 3.2 261 4.6 169 2.9 217 4.6 36 4.1 148 2.7 132 3.3 96 3.8 115 4.1 155 2.8 117 2.0 175 2.3 187 2.6 177 -
Well # 1 2 3 4 5 6 7
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April 16, 2014
Gas rates and condensate yields

5,000 4,500 4,000 3,500 0 2 4 IP 30 IP60 6 IP90 8 10 Condensate yield 12 14 300 270 240 210 180 150 120 90 60 30 13-17 03-19 14-30 14-02 05-23 16-25 16-17 0
3,000 2,500 2,000 1,500 1,000 500 0
Kakwa - type curve economics

900 800
360 Risked payout 270 180 90 0

700 600 500 400 300 200 100 0 1 6 11 16 21
Oil (bbls/d)
Assumptions Well Cost ($mm) $10.0 IP 30 (boe/d) 855 IP 30 (bbl/d) 405 EUR (mboe) 883 EUR (mbbl) 400
26 31 36 Months on production Production (boe/d)
41
46
51
56
61
Cumulative (mboe)
Risked Economics BT NPV (10) $10,883 ROR (% ) 69% Well Payout (months) 17 Half Cycle F&D ($/boe) $7.18 Recycle Ratio (times) 3.4x
Wapiti disappointing to date, but not dead The majority of Donnycreeks undeveloped land resides in Wapiti where the company owns 328 gross sections of land with a 75% working interest (246 net sections). This land position is undeveloped in the Montney with Donnycreeks Montney horizontal (1-26 well) marking the first horizontal Montney well within the acreage. Given the closest offsetting Montney well (either drilled or licensed) resides roughly 8 miles east, this well is a significant step out from the currently identified Montney fairway.
55
Condensate yield (bbl/mmcf)
Gas rate (mmcf/d)
April 16, 2014
While the results of the initial well (1.7mmcf/d, no free condensate) were not what the company was expecting, it does not mean the play is dead. With 328 sections of land, it would be unfair to assess the entire block based on a single result. However, the disappointing result does increase the risk profile associated with this land block. The market is correctly ascribing no value to the Wapiti land position at the moment. Donnycreek Wapiti
DCK Land (75%) DCK Well Drilled Montney wells Licensed Montney wells
CONCLUSION
We are initiating coverage of Donnycreek Energy with a BUY rating and $3.00 target price. Our investment thesis is based on our belief in the underlying value of the companys Kakwa liquids rich Montney gas project and free option on the companys significant undeveloped land at Wapiti. The company currently has enough financial flexibility to support an active 2014 drilling campaign which should result in material production growth through the year.
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APPENDIX A: DONNYCREEK ENERGY OPERATING AND FINANCIAL INFORMATION

Donnycreek Energy
DCK-TSX Rating Price Target Total Return BUY $3.00 47% Aaron Swanson, CFA - (403) 543-3563 aswanson@gmpsecurities.com Jordan McNiven - (403) 695-1401 jmcniven@gmpsecurities.com 2013A $2.57 $6.43 36.2x 36.0x $375,827 $10.28 $6.03 11.0 18.8 0.01 2013A $0.5 $1.8 $2.3 $0.06 $0.06 2014E ----7.2x 7.9x $91,047 --------0.03 2014E $5.8 $10.6 $16.4 $0.31 $0.29 2015E ----2.7x 3.1x $37,988 --------0.06 2015E $13.3 $30.2 $43.5 $0.80 $0.74
Company Overview Price as of 04/14/14 52 week High - Low Fully Diluted Shares Outstanding Market Capitalization 2014E Net Debt Convertible Debentures Enterprise Value Commodity Price Assumptions WTI (US$/bbl) Edmonton Par (C$/bbl) WCS (C$/bbl) Nymex (US$/mcf) AECO (C$/mcf) Exchange Rate (US$/C$) Realized Prices Crude Oil (C$/bbl) NGL (C$/bbl) Natural Gas (C$/mcf) Production Hedged (%) Daily Production Crude Oil (bbl/d) NGL (bbl/d) Heavy (bbl/d) Total Liquids (bbl/d) Natural Gas (mmcf/d) Total Production (boe/d) YoY Production Change Income Statement ($MM) Oil & Gas Revenue Hedging Gains/(Losses) Gross revenue Royalties Operating Transportation Net Operating Income Expenses G&A Interest DD&A Other Total Expenses Earnings Before Tax Income Tax (Recovery) Net Income EPS (basic) EPS (diluted) Corporate Netback ($/boe) Revenue Royalties Opex Field Netback G&A Interest Expense Cash Taxes and Other Hedging Cash Flow Netback $60.00 $50.00
$2.04 $3.20 - $1.66 58.6 $119.6 $10.4 $0.0 $130.1 2014E $95.90 $99.23 $85.60 $4.50 $4.63 $0.90 2014E $88.89 $92.39 $3.44 0% 2014E 647 37 0 684 4.5 1,429 518% 2014E $27.9 $0.1 $28.0 $1.4 $7.4 $0.0 $19.2 2015E $95.00 $97.78 $87.78 $4.25 $4.06 $0.90 2015E $87.78 $91.28 $3.06 0% 2015E 1,919 0 0 1,919 10.8 3,726 161% 2015E $73.6 $0.0 $73.6 $3.7 $19.4 $0.0 $50.5
2013A $97.99 $93.44 $78.01 $3.73 $3.17 $0.97 2013A $93.62 $53.93 $3.44 0% 2013A 100 10 0 110 0.7 231 577% 2013A $4.7 $0.0 $4.8 $0.2 $1.2 $0.0 $3.3
Key Valuation Ratios Base Net Asset Value ($/share) Risked Net Asset Value ($/share) P/CF (x) EV/DACF (x) EV/Production ($/boe/d) EV/1P Reserves ($/boe) EV/2P Reserves ($/boe) 1P RLI (years) 2P RLI (years) DA Production per Share (boe/d) Cash Flow Statement ($Mm) Operating Activities Net Income Non-Cash Items CF from Operations (Adj.) CFPS (basic) CFPS (diluted) Investing Activities Exploration and Development Net Acquisitions Reclamation Fund/Other CF from Investing Financing Activities Change in Total Debt Shares Issued Dividends/Other CF from Financing Activity Leverage Net Debt Total Debt Net Debt-CF Total Debt-CF Credit Facility % Utilized Shares Outstanding ($Mm) WA Outstanding Shares (basic) WA Outstanding Shares (diluted) GMP Net Asset Value 2013 YE Assigned Reserves Proven Probable 2P Reserves Other Assets/Liabilities Land Value Net Debt Option Proceeds & Other Total 2P Net Asset Value Unbooked Upside Potential Kakwa Middle Montney Gas (Hz) Wapiti Montney Gas Total 2P NAV + Risked Upside Value
($23.3) $0.2 $0.0 ($23.1)
($52.1) $0.0 $0.0 ($52.1)
($55.0) $0.0 $0.0 ($55.0)
$0.0 $42.7 $0.0 $42.7 2013A ($27.8) ($27.8) -11.9x -11.9x $15.0 -185% 2013A 37.2 40.6
$27.6 $7.4 $0.0 $35.0 2014E $10.4 $10.4 0.6x 0.6x $15.0 70% 2014E 53.4 40.6
$11.5 $0.0 $0.0 $11.5 2015E $21.9 $21.9 0.5x 0.5x $15.0 146% 2015E 54.7 58.6
$0.9 $0.1 $1.6 ($0.1) $2.5 $0.8 $0.2 $0.5 ($0.04) ($0.03) 2013A $51.39 $2.42 $14.78 $34.20 $10.83 $1.02 $0.20 $0.00 $22.15
$2.8 $0.1 $9.9 $0.0 $12.7 $6.5 $0.7 $5.8 $0.07 $0.07 2014E $53.70 $2.71 $14.24 $36.76 $5.33 $0.10 $0.00 $0.00 $31.33
$5.4 $1.5 $25.8 $0.0 $32.8 $17.7 $4.4 $13.3 $0.17 $0.16 2015E $54.10 $2.71 $14.25 $37.15 $4.00 $1.13 $0.00 $0.00 $32.02
Reserves (mmboe) 2.8 7.9 10.7
Net Locations 10 N/A 10
Net Risked Resource (mmboe) 8.8 N/A 8.8
BT PV@10% ($mm) $28.9 $70.8 $99.6 Value ($mm) $23.8 $27.8 $5.3 $56.9 $156.6 BT PV@10% ($mm) $90 N/A $90 $247
$NAV/ Share $0.52 $1.28 $1.80 $NAV/ Share $0.43 $0.50 $0.10 $1.03 $2.83 $NAV/ Share $1.54 N/A $1.54 $4.37
4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 2013e
Cash Flow Netback Taxes Interest
0.08 0.06 0.05 0.04 0.03 0.02 0.01 0.00
$40.00
$30.00 $20.00 $10.00 $0.00 2014e

G&A Royalties Op costs
2015e
Operating Netback Production Production per Share
57
Production (boe/d)
0.07
$/boe
April 16, 2014

Senior Executives and Board Members Biographies Management Malcolm Todd, President & CEO Murray Scalf, COO Robert Todd, CFO Board of Directors Ken Stephenson Malcolm Todd Murray Scalf Randy Kwasnicia Colin Watt
Source: Company Website
Former President and Director of Prairie Exploration and President of Prairie Pacific Energy. Mr. Todd has over 25 years experience in the natural resource sector. Previously President of Dorado Energy, Denim Exploration, and Dorchester Energy. Mr. Scalf has over 25 years of experience in the oil and gas industry. Former CFO of Prairie Exploration and Prairie Pacific Energy. Mr. Todd has over 25 years of experience in the oil and gas industry
Currenty a Director with Calvalley Petroleum and US Oil Sands See above See above President of Bralin Management; previously co-owner of Excalibur Drilling and Paragon Drilling President of Squall Capital; President & CEO of Lynden Energy Corp.
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Painted Pony Petroleum Ltd.

The year of the horse
BUY
PPY-T Target
Time to get after it Its no secret Painted Pony is sitting on a significant resource base with over 200 net sections of Montney land in northeastern. B.C., offering over 7.0 Tcfe of contingent resource. Within the next five years, the company plans to increase their Montney gas production ten-fold, drilling in excess of 300 horizontal locations requiring over $2 billion in drilling capital, and potentially eclipsing the 100,000 boe/d mark. With an estimated Montney production CAGR of 83% there is no doubt these growth projections are impressive, but we do feel the company will need to continue to deliver strong well results, have gas prices remain strong and look to external capital or asset sales to fund the growth. It is worth noting, the most recent operations update was a big step in the right direction as the company increased their 2014 production guidance by 13%, on the back of stronger than budgeted well results, better positioning the company to meet their ten-fold growth plans. Natural LNG consolidation opportunity Painted Ponys land base directly offsets Progress Energys (a wholly owned subsidiary of PETRONAS), a producer who is clearly establishing a resource base in preparation for potential LNG takeaway from the B.C. coast. With 1.7 Tcfe booked to their reserves and an additional 7.0 Tfce of contingent resource identified, it is clear to us that Painted Pony has the resource in place to be either a supplier of LNG feedstock or an acquisition candidate for a larger entity. Despite having a material amount of identified resource in place, it is our view that Painted Pony is looking to further de-risk their land base in order to better position themselves for a potential take-out. With the first LNG facilities expected to be operational by 2018, we believe late 2014 and 2015 could see further consolidation, as producers further position for LNG feedstock. Initiating coverage with a BUY rating and $14.75 target price In terms of contingent resource upside, strategic positioning for LNG, and longer term growth opportunities, we believe Painted Ponys Montney gas assets are unmatched. We are initiating coverage of Painted Pony with a BUY rating and $14.75 target price. Our target is based on a combination of our $17.45 Risked NAV and a 9.5 times 2015 EV/DACF multiple.
59
$11.35 $14.75
88.5/96.3 $11.5/$6.10 $1,093 $1,174 $82 30% N/A
2013A 1,551 42.9 8,693 32% $97.99 $3.73 $0.97 ($0.06) $0.54 $45.0 0.9x
2014E 1,995 65.6 12,926 49% $95.90 $4.50 $0.90 $0.16 $1.01 $81.7 0.8x
2015E 2,784 93.5 18,363 42% $95.00 $4.25 $0.90 $0.15 $1.33 $241.6 1.9x
16.0x 16.8x $100,281
11.2x 11.8x $90,859
8.5x 9.9x $72,671 $4.05 1.1x 0.7x
$12.00
PPY-T
8.0
$9.00
Close Price
6.0
Volume (Millions)
$6.00
4.0
$3.00
2.0
$0.00
May -13
Jul-13
Sep-13
Nov -13
Jan-14
Mar-14
.0
April 16, 2014

1) LNG upside: supplier or take out candidate 2) Switch to ball-drop well completion method: materially improving type curves 3) Five-year plan: to 100,000 boe/d and beyond
1) LNG upside: supplier or take out candidate

When looking at potential natural gas supply sources for BCs fledgling LNG industry, Painted Pony appears to be holding some prime real estate. And much like the traditional real estate market, the adage of location, location, location, seems to hold true for the LNG industry as well. Not only does Painted Ponys land base sit in the heart of the natural gas fairway expected to supply west coast LNG terminals, but current and proposed transportation arteries run directly through the companys land. Spectras Mainline, which traverses the entire province from north to south, is the primary natural gas conduit in B.C. and bisects Painted Ponys land. Kitimat is currently connected to Spectras Mainline via the PNG Mainline and several other offshoots are planned to take gas from Spectras Mainline and deliver it to Kitimat and/or Prince Rupert. All this to say, Painted Ponys land base essentially lies at the hub of the LNG transportation network and the company has enough resource in the ground to be a very attractive upstream asset for the LNG industry. Painted Pony all about location
Storm Carmel Bay Painted Pony
Artek
Husky Petronas
PPY Petronas / Progress HSE TOU RTK RDS ARX SRX Carmel Bay
Shell
Tourmaline ARC
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April 16, 2014
With the companys 2013 reserve report estimating contingent resource at 7.0 Tcfe, the land holds enough 2P and contingent resource to fill a 1 bcf/d LNG train for nearly 20 years. Since December 2010, there arguably have been six transactions (either acquisitions or joint ventures) in Western Canada that have a distinct LNG angle to them; the most recent major transaction being Novembers Petronas purchase of Talismans Farrell Creek and Cypress assets in B.C. Based on disclosed transaction prices, nearly $12 billion has exchanged hands across the six deals, for which metrics are provided below (production adjusted metrics assume production value of $50,000/boe). What can be said about the below metrics is the values vary significantly, as do the related asset purchases and joint ventures. Historical B.C, Montney - LNG related transactions
Acquisition Progress and Julienne land Talisman and Petronas Petronas and Progress Energy Joint Venture Encana and Mitsubishi Talisman and Sasol (Farrell Creek) Talisman and Sasol (Cypress A) Total / Wt. Average Date Mar-14 Nov-13 Jun-12 Feb-12 Dec-10 Mar-11 Value ($mm) $130 $1,100 $5,900 $2,900 $1,030 $1,050 $11,980 Purchased resource Metrics Metrics - production adjusted Production Land Contingent Production Land Contingent Land Contingent (mmcfe) (net acres) (tcfe) ($/mcf) ($/acre) ($/mcfe) ($/acre) ($/mcfe) N/A 33,500 N/A N/A $3,881 N/A N/A N/A 75 127,000 10.4 $14,667 $8,661 $0.11 $4,921 $0.060 280 795,000 8.1 $21,071 $7,421 $0.73 $489 $0.048 N/A 25 N/A 380 163,600 25,500 28,600 1,139,700 3.24 4.8 5.6 32.14 N/A $41,200 N/A $15,266 $17,726 $40,392 $36,713 $15,432 $0.90 $0.21 $0.19 $0.62 N/A $1,362 N/A $810 N/A $0.007 N/A $0.03
Source: Company reports, GMP
The real question becomes, what are Painted Ponys Montney assets worth if we assume they are positioned for an LNG related acquisition? Its a bit of tricky question given the range of calculated metrics in the above exhibit, but if we assume the late 2013 Talisman / Petronas deal was indicative of current land value (given it is the most sizeable transaction), and use a weighted average production metric and the median value for contingent resource, we determine the value of Painted Ponys assets range from $900 million to $1.5 billion ($9.20 $15.65/share). Acquisition value based on calculated metrics
Metrics Production all-in Land** Contingent resource ($/boe/d) ($/acre) ($/mcfe) $91,598 $3,881 $0.21 Ex production Median
PPY assets Production Q1'14E boe/d Land net acres Resource (contingent) tcfe
9,674 130,200 7.02
Implied valuations Value per share Current production ($m) $886,114 $9.20 Land + production ($m) $988,951 $10.27 Resource value ($m) $1,506,375 $15.65 *Production value based on GMP estimates **Land value calculated by netting out $50,000/boe/d for production value
Who needs supply? To date, the National Energy Board has received eleven applications for west coast LNG export licenses, for a total capacity of 21.2 bcf/d. Of the eleven, eight
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April 16, 2014
have been approved, with combined export capacity of 15.1 bcf/d, while the remaining four, which are still in the regulatory process, could add an incremental 5.1 bcf/d. While many of the project proponents already possess the upstream assets required for their facilities, four projects with a combined capacity of 4.0 Bcf/d (Woodfibre LNG Export Pte. Ltd., Jordan cove LNG L.P., Triton LNG L.P., and Kitsault Energy Ltd) lack the dedicated resources to supply their LNG projects, hinting these companies may be in the market for supply. Given Painted Ponys advantageous land position and size, we believe it is well positioned to provide LNG feedstock, either as takeout candidate, or supplier. LNG export license applications
Project KM LNG Operating General Partnership BC LNG Export Co-operative LLC LNG Canada Development Inc Pacific Northwest LNG Ltd WCC LNG Ltd Prince Rupert LNG Exports Ltd Woodfibre LNG Export Pte. Ltd. Jordan Cove LNG L.P. Triton LNG L.P. Kitsault Energy Ltd. Aurora Liquefied Natural Gas Ltd. Company/Ownership Apache/Chevron Haisla Nation/LNG Partners LLC Shell/PetroChina/Mitsubishi Corp/Korea Gas Corp Petronas - Progress/JAPEX/PetroluemBRUNEI Imperial Oil Resources Ltd/ExxonMobil Canada Ltd British Gas Group (BG) Pacific Oil & Gas Ltd Veresen Inc Altagas Pacific Partnership/Indemiitsu Kosan Co Ltd Kitsault Energy Ltd. CNOOC/INPEX Gas BC Ltd Export License Approved Approved Approved Approved Approved Approved Approved Approved Under Review Under Review Under Review Capacity (BCF/D) 1.3 0.2 3.2 2.6 3.9 2.8 0.3 0.8 0.3 2.6 3.2 21.2
Source: National Energy Board, GMP
When do they need it? With Painted Ponys land base largely undeveloped, we believe it would take 3 to 4 years to develop the asset in order to meet the demands of LNG. Under our base case 5-year model, we forecast 2018 average gas production of nearly 0.5 bcf/d, at which point production would be sufficient to be the sole provider for one of the smaller facilities, or be a major contributor to a larger facility. Additionally, the companys internal 5-year plan calls for 319 wells to be drilled, compared to total Montney inventory of 2,000 wells, hinting at the productive potential of the land, as well as the potential to escalate the pace of development with additional capital. With the first LNG facilities expected to come on-line in 2017 at the earliest, we suspect resource positioning and acquisition activity to accelerate within the next two years.
2) In the meantime ball-drop completions materially improving type curves

In early 2013, Painted Pony changed completion techniques on their Montney wells, switching to ball-drop completions from a perf-and-plug style. Results to date have been very impressive as production data suggests, on a cumulative production basis, the balldrop wells are outperforming the perf-and-plug wells by approximately 70% in the first month and 40% by the tenth month. Compared to our type curve, which is composed of all producing Painted Pony wells, the ball-drop wells are outperforming the type curve by 42% in month one, and 22% after 10 months. When we combine the fact the ball-drop wells cost approximately $0.75 million less and deliver superior production rates, our economics are materially improved. We estimate the increased production rates combined with the cost reduction, increase well NPV by over two-times, relative to perfand-plug, and cut the payout period down by nearly two years. Given the ball-drop wells are significantly outperforming our type curve, we see potential for the type curve to move
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April 16, 2014
materially higher, provided new wells continue to track the ball-drop rates achieved to date. Its also worth noting, our type curve assumes a liquids yield of 14 bbls/mmcf, with condensate accounting for 50% of total liquids. However, the liquids yields show considerable variability, with many of the wells being relatively dry. Results to date, point to the Townsend area as having a much higher liquids content (wells 3 & 4 in the figure below), while the wells at Blair and Daiber, tend to be dry (in terms of free liquids volumes). Ball-drop completions vs. perf-and-plug
300,000 Ball-drop wells Base type curve Perf-plug wells 250,000 200,000 150,000 100,000 50,000 -
2013 well results gas rates and condensate yields

12,000 10,000 8,000 6,000 4,000 2,000 IP30 2.0 4.0 IP60 6.0 IP90 8.0 Condensate 10.0 12.0
ball-drop
14.0 60 50
Cumulative production (boe)
30 20 10 1 2 3 4 5 6 2013 wells 7 8 9 10
5 6 7 Producing month
10
IP 30 (boe/d) IP 30 liquids. Yield (bbl/mmcf) Payout (months) NPV ($m, before tax)
Source: Company disclosures, geoScout, GMP Securities
Perf-plug 792 14 38 $4,474
Type curve 893 14 22 $6,588
Ball-drop 1,269 14 14 $9,669
3) The five-year plan: to increase production tenfold

Painted Pony has laid out a five year plan (2014 to 2018) to develop their Montney play, which will see the company drill over 300 horizontal wells and reach 100,000 boe/d by the end of 2018. Under our base case scenario, which utilizes a Montney type curve similar to the companys, we are running a much more conservative 5-year plan as we restrain capital in an effort to retain a certain degree of financial flexibility (we also use a long term flat gas price of $3.68/mcf). Despite our more conservative spending assumptions, our estimates call for a CAGR over the five years of 66% with a total return on the project of $744 million. Further, if new wells continue to exceed the type curve, we estimate production could easily eclipse 100,000 boe/d. Keep in mind our development plan assumes no production before 2014 and is taking a half cycle view.
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Condensate (bbl/mmcf)
Natural gas (mcf/d)
40
April 16, 2014
PPY Montney development from 2014 2018: GMP base case

100,000 90,000 80,000 70,000 60,000
boe/d
2018
2017
2016
2015
2014
50,000 40,000 30,000 20,000 10,000 0 Jan '14 Jul '14 Jan '15 Jul '15 Jan '16 Jul '16 Jan '17 Jul '17 Jan '18 Jul '18
GMP Montney development plan

Year 2014 2015 2016 2017 2018 Wells (net) 17 25 45 65 80 Drilling Capex Production ($mm) (boe/d) $140 7,878 $230 14,980 $334 30,543 $512 50,054 $579 73,601 D/CF ** (times) 1.8x 2.1x 1.6x 1.5x 1.2x
**represents Montney only related debt and cash flow Source: Company disclosures, GeoScout, GMP Securities
Resource is present, but potentially so are funding needs Painted Ponys five year development plan is highly sensitive to gas prices. Under the more aggressive company scenario, we estimate capital spending will be approximately $1 billion higher than our forecast cash flow (this is using the flat GMP price deck assumptions). Even with our more conservative capital spending assumptions, we foresee a trailing debt to cash flow of 2.1x in 2015, which would leave the company over levered compared to their peers. We believe there are a number of ways the company will reduce this relative leverage including the disposition of their light oil assets in Saskatchewan, or the issuance of equity.
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April 16, 2014

On 2014 metrics, Painted Pony is currently trading at an average premium of 40% relative to its peer group; this is not a huge surprise as the company has historically traded above its peers. We believe the market is awarding Painted Pony a premium valuation for: 1) take-out potential related to its northeast B.C. Montney resource base, and 2) above average per share growth profile which we expect will become even more pronounced in 2015, as Painted Pony is planning a much more significant capital spending program. Comparable valuations
Production 2014E Name Artek Exploration Ltd. Advantage Oil & Gas Birchcliff Energy Ltd. Cequence Energy Ltd. Crocotta Energy Inc. Delphi Energy Corp. Donnycreek Energy Cor Kelt Exploration Ltd. NuVista Energy Ltd. Painted Pony Petroleum Pine Cliff Energy Santonia Energy Ltd. Storm Resources Median PPY vs Median Ticker RTK AAV BIR CQE CTA DEE DCK KEL NVA PPY PNE STE SRX (boe/d) 4,708 22,065 33,567 13,500 9,600 10,330 1,429 10,908 18,194 12,926 6,354 3,837 5,988 10,330 25% % Gas 2014E (%) 63% 99% 82% 86% 73% 71% 52% 72% 69% 85% 95% 81% 79% 79% 7% PPS Growth 2014E (%) 15% 13% 26% 31% 6% 25% 336% 48% -12% 47% 14% -10% 14% 15% 201% D/CF 2014E (x) 2.1x 1.4x 1.2x 1.4x 1.4x 2.0x 0.6x 0.0x 0.8x 0.8x -1.0x 1.2x 0.9x 1.2x -27% (x) 8.5x 7.5x 7.3x 7.5x 5.4x 8.4x 7.9x 16.0x 10.0x 11.8x 6.4x 8.8x 13.7x 8.4x 41% EV/DACF 2014E 2015E (x) 6.5x 6.9x 6.6x 6.4x 4.7x 7.1x 3.1x 11.4x 7.7x 9.9x 7.5x 9.9x 10.3x 7.1x 40%
Valuation
EV/boe/d 2014E $/boe/d $80,261 $60,663 $72,665 $57,248 $54,395 $63,310 $91,047 $92,902 $91,005 $90,859 $43,378 $52,579 $109,053 72,665 25% 2015E $/boe/d $69,045 $52,123 $60,394 $50,044 $47,134 $53,885 $37,988 $109,693 $70,244 $72,671 $43,245 $55,960 $79,754 55,960 30% 2014E (x) 6.7x 5.8x 5.7x 6.1x 3.9x 7.0x 7.2x 15.5x 9.4x 11.2x 7.3x 8.0x 12.9x 7.2x 57% P/CF 2015E (x) 5.0x 5.2x 5.1x 5.0x 3.3x 5.9x 2.7x 10.9x 7.2x 8.5x 8.6x 9.1x 9.7x 5.9x 46%
NAV discussion Based on the companys recently updated reserve report, Painted Pony has a total of 290.3 mmboe of Proven and Probable reserves composed of 91% gas. Given Painted Ponys identified resource, it should come as no surprise the majority of the companys reserves are booked as Probable; of their total 2P bookings, 79% (230 mmboe) are booked as Probable. On a 2P basis, Future Development Capital (FDC) sits at $2.4 billion and is spread out over seven years. By our estimates, Painted Ponys FDC represents roughly 32 times our 2014 cash flow estimate and 16x our 2014 capital spending estimates. Based on our internally generated price deck, we estimate Painted Ponys current 2P NAV is $10.50/share, backstopped by a 1P NAV of $4.89/share. Details of our Base NAV can be found in our breakdown table seen on the following page.
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Risked NAV Within their internal five year Montney development plan, Painted Pony is expecting to drill in excess of 300 net horizontal locations across their land base. The most recent reserve report includes 335 net undrilled locations meaning all of the companys drilling plans over the next five years have been booked to their 2P reserves. While there is no doubt the companys land offers more than the 335 net Montney locations, we are hesitant to allocate the 2,000+ locations used by the reserve engineers as part of their Contingent and Prospective resource evaluation, given the time and capital required to develop the resource. At this point, our Risked Upside does not capture any resource value until all of the 335 booked locations have been drilled (we estimate this is by year 2019), at which point we allocate an additional 200 net horizontal locations that are drilled over the subsequent years. We recognize layering in an additional 200 locations is conservative but given the time to convert these locations into producing wells is so long, being conservative seems like a good bet. These locations in addition to the unbooked locations represent roughly 25% of Painted Ponys total Montney gas inventory. Our Risked NAV does not account for the total identified resource in place as recently evaluated by the companys reserve engineers. Across Painted Ponys Montney properties, on a Best Estimate basis, the reserve engineers have identified 7.0 Tcfe of potentially recoverable gas resource, based on a Total Petroleum Initially in Place (TPIIP) value of 41.9 Tcf. On a Best Estimate basis, the reserve engineers have assigned a value of $4.65 billion to the contingent resource in place. When we combine our Base NAV and Risked upside, we calculate a Risked NAV for Painted Pony at $17.45 per share. Details of both our Base and Risked NAV can be seen on the following page. Further to this, based on current trading levels, the company is trading at a 8% premium to their Base NAV meaning over 350 non-producing locations are being recognized in the market (335 of which are currently booked to their 2P reserves). Given Painted Pony is a NAV-driven story it is worth pointing out the sensitivity of our Risked NAV to gas prices. A 10% increase to our long-term gas price assumptions increases our Risked NAV by nearly 20%.
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2013 Assigned Reserves Proven Probable 2P Reserves Other Assets/Liabilities Land Value (240,000 acres @ $900 per acre) Net Debt Option Proceeds & Other Total 2013 2P Net Asset Value Unbooked Upside Potential BC Montney Gas (HZ) Total 2P NAV + Risked Upside Value $18.00 $16.00 $14.00 $12.00 $10.00
$/share
Reserves (mmboe) 59.9 230.4 290.3
Net Locations 200 200
Net Risked Resource BT PV@10% (mmboe) ($mm) 241.7 $669 241.7 $669 $1,680
BT PV@10% ($mm) $234 $540 $773 Value ($mm) $215 ($45) $68 $237 $1,011
$NAV/ Share $2.43 $5.61 $8.03 $NAV/ Share $2.23 ($0.47) $0.70 $2.47 $10.50 $NAV/ Share $6.95 $6.95 $17.45
$8.00 $6.00 $4.00 $2.00 $0.00

Proved 2P

BC Montney Gas (HZ)
Target price calculation Consistent with the target price methodology for the majority of our companies under coverage, we utilize a combination of our Risked NAV and a 2015 EV/DACF multiple. For Painted Pony, our $14.75 target price is based on a Risked NAV of $17.45 and a 2015 EV/DACF multiple of 9.5 times.
RISKS TO OUR THESIS

LNG projects are not certain: One of the most significant risks we see relating to Painted Pony is the prospect of LNG exports from Western Canada. The reason why this risk is so material is if LNG doesnt materialize in Western Canada, the chance that Painted Pony is seen as an acquisition target is significantly reduced, ultimately resulting in a compression of its trading multiple. Outside of individual project approvals, we see the B.C. LNG tax as being a potential deterrent to LNG investment. Also currently squeezing LNG economics is a weaker Canadian dollar, the recent increase in Western Canadian gas prices and the respective LNG contract pricing. Access to capital: Traditionally, the company has carried a relatively clean balance sheet providing an ample amount of financial flexibility. However, debt levels are starting to creep up as the company moves into a more aggressive resource development phase on their Montney project. With a net capital program of 2.8x cash flow in 2013 and 1.5x our forecast cash flow in 2014, we estimate the company will exit the year with a D/CF ratio of just under 0.6x, not stretched by any means but a
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significant divergence away from the usually debt free balance sheet. Relative debt is a key metric for the company, as they have laid out a five-year development plan which includes the drilling of over 300 horizontal Montney wells with production peaking near 100,000 boe/d. In order to finance this commitment of over $2 billion, we believe Painted Pony may have to bring in additional funding (based on our pricing assumptions), through either asset sales or external capital. If the company cannot access the needed capital, it is likely their spending (and growth) plans will be reduced. Gas prices: Painted Ponys five year development plan is highly sensitive to gas prices. We forecast that as the company develops their Montney land base, production weighting will increase to over 90% gas (up from 83% currently). While the company is taking a more active approach to hedging to minimize the funding gap created by their development plans, stronger cash flow driven by higher gas prices would be welcomed and would help alleviate any sort of financing risks by reducing the funding gap.

Painted Pony got its beginnings in 2007, producing light oil out of the Bakken formation in southeast Saskatchewan. In 2008, the company acquired prospective gas assets in Northeast B.C., an area which has progressively seen a greater share of the companys operations. In September 2011, the company drilled its first Montney well in B.C. and followed it up by purchasing its partners working interest within the Cypress block, adding 13 net sections. The Cypress footprint was further expanded in April 2012, with the acquisition of 18.4 net sections. A further 25 sections were added via acquisition in December 2012, with the company now holding 203 net sections, with an average working interest of 73%. Painted Pony has an impressive growth record, increasing production from 1,500 boe/d in 2009, to 8,693 boe/d in 2013 and we are estimating average production of 11,300 boe/d in 2014 representing nearly 30% per share growth (roughly 15% debt adjusted). This growth has been led by the Montney and there is plenty of running room remaining, as only 14% of the land base has been developed. The company has drilled 41 Montney wells to date, a total which is expected to grow rapidly, with over 300 wells planned from 2014 through 2018.
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CORE AREA OVERVIEW

Painted Ponys 203 net sections of prospective Montney in Northeast B.C. form the centerpiece of the company. However, the company also holds light oil assets in Southeast Saskatchewan, which currently produce in excess of 1,000 bbls/d. Given the limited amount of capital set to be directed to their light oil assets, our core area review will focus on their B.C. Montney assets. BC Montney the present and future To date, Painted Pony has operated, or participated in, roughly 50 horizontal Montney wells in northeast B.C., and has successfully produced out of three sub intervals within the greater Montney package (upper, middle and lower). Generally speaking, the Montney Painted Pony is chasing is roughly 300m thick and consists of an over pressured reservoir. The majority of the companys operated drilling has taken place between their south-Blair blocks and Townsend blocks. This leaves west Blair, north Blair, Cypress and Diaber significantly undeveloped. Near term drilling activity is set to stay within south Blair, Diaber and Townsend blocks, with the 2014 drilling schedule calling for 6 wells at Townsend, 8 at Blair and 2 at Diaber. Painted Pony BC Montney map
West Blair
Cypress
Blair
Daiber
Townsend
PPY land PPY operated Hz
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The resource is significant but needs to be further de-risked With over 200 net sections of Montney land, 1.7 Tcfe of gas booked on their 2P reserve report and another 7.02 Tcfe of contingent recoverable resource, it is no secret that Painted Pony is a resource rich company. The Montney in Painted Ponys operating area tends to be aerially extensive but the issue at this point in time is development, as much of the lands currently sit undeveloped, particularly on the western portion of their land base. While 2014 drilling activity is planned to remain within the confines of Painted Ponys south Blair and Townsend blocks, given their five year plan is calling for over 300 net horizontal Montney locations to be drilled, the company will need to de-risk some of their higher risk lands to the west. Much of the booked, and contingent resource identified falls within the Blair, Diaber and Townsend window, where the company has booked multiple layers in the formations (some sections have the lower, middle and upper Montney booked). In an effort to help support their growth, the company recently brought on a 25 mmcf/d processing and condensate stabilization facility at Townsend, increased the Blair facilitys capacity to 40 mmcf/d (from 33 mmcf/d) and is looking to construct a 190 mmcf/d shallow-cut refrigeration plant in 2015. Painted Pony Montney map with offsetting producers
West Blair Cypress Blair
Daiber
PPY land PPY operated Hz Progress Montney Hz Shell Montney Hz
Townsend
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Economics comparing our base case and upside case Our base case type well is an average of all Painted Ponys horizontal Montney wells drilled to date, while the upside case is a better representation of the more recent wells that have been completed with the ball-drop system. Base case and Upside case comparative economics
1,000 900
Risked payout
630
800 700 600 500 400 300 200 100 0 1 6 11 16 21 26 31 36 Months on production Production (boe/d) 41 46 51 56 61
540 450 360 270 180 90 0
Oil (bbls/d)
Assumptions Well Cost ($mm) IP 30 (boe/d) IP 30 (bbl/d) EUR (mboe) EUR (mbbl) $7.2 893 69 1,088 113
Cumulative (mbe)
Risked Economics $6.6 52% 22 $6.54 3.0x
BT NPV (10) ROR (% ) Well Payout (months) Half Cycle F&D ($/boe) Recycle Ratio (times)
1,400
810 630 540 450 360 270 180 90 1 6 11 16 21 26 31 36 Months on production Production (boe/d) 41 46 51 56 61 0
1,200 1,000 800 600 400 200 0
Risked payout
720
Oil (bbls/d)
Assumptions Well Cost ($mm) $7.2 IP 30 (boe/d) 1,269 IP 30 (bbl/d) EUR (mboe) EUR (mbbl) 98 1,238 113
Cumulative (mboe)
Risked Economics BT NPV (10) $9.7 ROR (% ) 96% Well Payout (months) Half Cycle F&D ($/boe) Recycle Ratio (times) 14 $5.62 3.4x
Base Case Upside Case Change

Well Perfromance

Economics
893 69 1,088 $6.6 52% 22
1,269 98 1,238 $9.7 96% 14
42% 42% 14% 47% 86% -36%
As shown above, our Painted Pony B.C. Montney base case type curve has a risked IP 30 of 893 boe/d and pays out in 22 months. We have run an initial liquids yield of 14 bbls/mmcf, of which 50% is made up of condensate. It is this base case well that we use for our Risked NAV and five-year plan development scenario. Again, it is worth pointing out this base case type well is based on the average well performance from all of Painted Ponys Montney wells drilled to date. Given the company has altered their completion method, driving much better well performance, we have also run an upside case illustrated in the above exhibit. With the company planning to
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continue with the new completion method, we are likely to see our base case type curve move towards the upside case, as a greater share of producing wells will be utilizing the improved techniques. As the type curve moves up, it will result in a significant improvement in NPV, rate of return, payouts period and ultimately lead to a more robust growth profile.
CONCLUSION
We are initiating coverage of Painted Pony Petroleum with a BUY rating and $14.75 target price. Our investment thesis is based on our principal belief that Painted Ponys type curves are moving higher with the new completion technique, and that they are sitting on an extensive resource base, strategically positioned for LNG acquisition activity.
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APPENDIX A: PAINTED PONY PETROLEUM OPERATING AND FINANCIAL INFORMATION

Painted Pony
PPY-TSX Rating Price Target Total Return BUY $14.75 30% Aaron Swanson, CFA - (403) 543-3563 aswanson@gmpsecurities.com Jordan McNiven - (403) 695-1401 jmcniven@gmpsecurities.com 2013A $10.50 $17.45 16.0x 16.8x $100,281 $14.56 $3.00 17.6 85.4 0.09 2013A $1.6 $49.2 $50.8 $0.58 $0.54 2014E ----11.2x 11.8x $90,859 --------0.13 2014E $27.6 $69.7 $97.3 $1.10 $1.01 2015E ----8.5x 9.9x $72,671 --------0.17 2015E $32.2 $95.8 $128.0 $1.45 $1.33 Company Overview Price as of 04/15/14 52 week High - Low Fully Diluted Shares Outstanding Market Capitalization 2014E Net Debt Convertible Debentures Enterprise Value Commodity Price Assumptions WTI (US$/bbl) Edmonton Par (C$/bbl) WCS (C$/bbl) Nymex (US$/mcf) AECO (C$/mcf) Exchange Rate (US$/C$) Realized Prices Crude Oil (C$/bbl) NGL (C$/bbl) Natural Gas (C$/mcf) Production Hedged (%) Daily Production Crude Oil (bbl/d) NGL (bbl/d) Heavy (bbl/d) Total Liquids (bbl/d) Natural Gas (mmcf/d) Total Production (boe/d) YoY Production Change Income Statement ($MM) Oil & Gas Revenue Hedging Gains/(Losses) Gross revenue Royalties Operating Transportation Net Operating Income Expenses G&A Interest DD&A Other Total Expenses Earnings Before Tax Income Tax (Recovery) Net Income EPS (basic) EPS (diluted) Corporate Netback ($/boe) Revenue Royalties Opex Field Netback G&A Interest Expense Cash Taxes and Other Hedging Cash Flow Netback $45.00 $40.00 $30.00
$/boe Production (boe/d)
$11.35 $11.98 - $6.05 96.3 $1,092.8 $81.7 $0.0 $1,174.5 2014E $95.90 $99.23 $85.60 $4.50 $4.17 $0.90 2014E $98.39 $71.89 $4.69 23% 2014E 1,405 845 0 2,250 73.7 14,527 67% 2014E $180.3 ($4.2) $176.1 $13.5 $52.7 $0.0 $110.0 2015E $95.00 $97.78 $87.78 $4.25 $3.65 $0.90 2015E $97.28 $70.78 $4.31 3% 2015E 1,712 1,072 0 2,784 93.5 18,363 26% 2015E $235.4 ($1.9) $233.5 $16.5 $70.4 $0.0 $146.7
2013A $97.99 $93.44 $78.01 $3.73 $3.08 $0.97 2013A $93.37 $66.09 $3.46 0% 2013A 1,102 449 0 1,551 42.9 8,693 32% 2013A $102.3 $0.8 $103.1 $6.8 $36.4 $0.0 $59.9
Key Valuation Ratios Base Net Asset Value ($/share) Risked Net Asset Value ($/share) P/CF (x) EV/DACF (x) EV/Production ($/boe/d) EV/1P Reserves ($/boe) EV/2P Reserves ($/boe) 1P RLI (years) 2P RLI (years) DA Production per Share (boe/d) Cash Flow Statement ($Mm) Operating Activities Net Income Non-Cash Items CF from Operations (Adj.) CFPS (basic) CFPS (diluted) Investing Activities Exploration and Development Net Acquisitions Reclamation Fund/Other CF from Investing Financing Activities Change in Total Debt Shares Issued Dividends/Other CF from Financing Activity Leverage Net Debt Total Debt Net Debt-CF Total Debt-CF Credit Facility % Utilized Shares Outstanding ($Mm) WA Outstanding Shares (basic) WA Outstanding Shares (diluted) GMP Net Asset Value 2013 YE Assigned Reserves Proven Probable 2P Reserves Other Assets/Liabilities Land Value (240,000 acres @ $900 per acre) Net Debt Option Proceeds & Other Total 2P Net Asset Value Unbooked Upside Potential BC Montney Gas (HZ) Total 2P NAV + Risked Upside Value
($142.6) ($0.3) $0.0 ($142.8)
($145.0) $11.0 $0.0 ($134.0)
($288.0) $0.0 $0.0 ($288.0)
$28.6 $2.5 ($0.7) $30.4 2013A $45.0 $45.0 0.9x 0.9x $125.0 36% 2013A 88.4 95.0
$36.7 $0.0 $0.0 $36.7 2014E $81.7 $81.7 0.8x 0.8x $125.0 65% 2014E 88.5 95.0
$160.0 $0.0 $0.0 $160.0 2015E $241.6 $241.6 1.9x 1.9x $125.0 193% 2015E 88.5 96.3
$8.7 $1.1 $42.4 $5.5 $57.7 $2.2 $0.6 $1.6 ($0.06) ($0.06) 2013A $32.49 $2.14 $11.48 $18.88 $2.73 $0.35 $0.00 $0.00 $15.80
$10.1 $2.5 $62.5 $0.0 $75.2 $34.8 $7.2 $27.6 $0.17 $0.16 2014E $38.22 $2.85 $11.17 $24.20 $2.15 $0.53 $0.00 ($0.89) $21.52
$11.7 $6.9 $88.8 $0.0 $107.5 $39.2 $7.0 $32.2 $0.17 $0.15 2015E $35.12 $2.46 $10.50 $22.16 $1.75 $1.03 $0.00 ($0.28) $19.38
Reserves (mmboe) 59.9 230.4 290.3
Net Locations 200 200
Net Risked Resource (mmboe) 241.7 241.7
BT PV@10% ($mm) $233.8 $539.7 $773.5 Value ($mm) $215 ($45.0) $68 $237.4 $1,011 BT PV@10% ($mm) $669 $669 $1,680
$NAV/ Share $2.43 $5.61 $8.03 $NAV/ Share $2.23 ($0.47) $0.70 $2.47 $10.50 $NAV/ Share $6.95 $6.95 $17.45
25,000 20,000 15,000 10,000 5,000 0 2013e

0.25 0.20 0.15 0.10 0.05 0.00

$35.00 $25.00 $20.00 $15.00 $10.00 $5.00 $0.00 2014e

2015e
Operating Netback Production Production per Share
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APPENDIX B: MANAGEMENT AND BOARD OF DIRECTOR BIOGRAPHIES

Senior Executives and Board Members Biographies Management Patrick Ward, President & CEO Mr. Ward, P. Geol, who has more than 31 years of experience in the oil and natural gas industry, graduated from the University of Calgary in 1978 with an Honors Degree in Geology. Mr. Ward was Vice-President, Exploration of Innova Exploration from May 2004 to May 2006. Mr. Ward co-founded Chowade Energy Ltd. in 2003 which was merged into Innova Exploration in 2004. From 1999 to 2003 Mr. Ward was Manager, Geology & Geophysics with the NCE Resources Group and Petrofund Energy Trust, where he was a key member of the Petrofund Management team.
John Van de Pol, VP, Finance & CFO
Mr. Van de Pol is a Chartered Accountant with over 33 years of experience in the oil and gas industry. Most recently, from 2009 to 2012, Mr. Van de Pol was the President and Chief Financial Officer of Rock Energy Inc., a publicly traded junior exploration and production company. Prior thereto, Mr. Van de Pol held the position of Senior Vice President and Chief Financial Officer of Northrock Resources Ltd., a growth oriented intermediate exploration and production company from 1993 until 2008. Mr. Hall has over 30 years of experience in the oil and gas industry including land negotiations, acquisitions, divestments and strategic planning initiatives. Mr. Hall has been working with Painted Pony since 2008, holding the role of Negotiations Specialist, where he has been a key member of the team in the development of corporate strategy, deal generation and partner relationships. Mr. Hanbury is a professional engineer with over 26 years of experience in the oil & natural gas industry. Most recently, Mr. Hanbury was Executive Vice President at Daylight Energy Ltd. from 2006 through to its acquisition by Sinopec International Petroleum Exploration and Production Corporation in 2011. From 2005 until 2006, Mr. Hanbury served as the Vice President and Chief Operating Officer of Sequoia Oil & Gas Trust, and as a director of White Fire Energy Ltd. following its spinout from Lightning Energy Ltd. Dr. McNamara is a professional geologist with over 25 years of experience in the oil & natural gas industry. Most recently, Dr. McNamara was Vice President, Development at Spartan Oil Corp., from June 2011 to July 2012, and prior thereto, he was Vice President, Geology at Spartan Exploration Ltd., from 2009 until 2011. Mr. Reimer is a professional geologist with more than 30 years experience in the oil and gas business. He brings an extensive background in domestic and frontiers exploration management to Painted Pony. Most recently, he was Executive Vice President of Result Energy Inc. and co-founder of Online Energy Inc
Bruce Hall, VP, Land
Edwin Hanbury, VP, Engineering
Barry McNamara, VP, Corporate D l t James Reimer, VP, Exploration Board of Directors Glenn R. Carley
Director of Marquee Energy Ltd., a public oil and gas company, since December 2011 and is a former Director of Guide Exploration Ltd. (formerly Galleon Energy Inc.), a public oil and gas company, from 2003 until 2011 (and Executive Chairman from January 2003 to August 2011). Mr. Angus is President of KD Angus Corp. (a private company providing exploration consulting services.) and was Vice President, Exploration of Surge Energy Inc. (a public oil and gas company) from April 2010 to October 2012 President of Ashton Petroleum Consultants Ltd. (a private company providing consulting services to the energy sector) since 1985. Mr. Ashton served on the Board of Directors of Cobalt Energy Ltd., (a public oil and gas company) from June 2007 to July 2009. Dr. Joubert has held several executive positions in the Sasol Group of companies in the past 19 years including his role as former Country President of Sasol Canada since March 2011. From June 2003 until March 2011, he was a Group Executive of Sasol Limited (a position similar to a Senior Vice President) for Legal and Assurance. Chief Financial Officer of Crown Point Ventures Ltd. from October 2009. President of 554492 Alberta Ltd. (a private company providing consulting services to the energy sector since 1993). Mr. Madden was Vice President Finance, Chief Financial Officer, and Director of Adamant Energy Inc. (a private oil and gas company) from July 2004 to May 2008 See above
Kevin D. Angus
Allan K. Ashton
Nereus L. Joubert
Arthur J.G. Madden
Patrick R. Ward
Source: Company disclosures
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Jordan McNIven jmcniven@gmpsecurities.com (403) 695-1401
Storm Resources Ltd.

The perfect Storm
Rating Target Production 2014E (boe/d) 6:1 Production 2015E (boe/d) 6:1 CFPS 2014E (f.d.) CFPS 2015E (f.d.) SHARE DATA Shares o/s (mm, basic/f.d) 52-week high/low Market Capitalization (mm) Enterprise value (mm) Net debt (mm) - 2014E Projected Return Dividend Yield FINANCIAL DATA Oil and NGLs (b/d) Natural Gas (mmcf/d) Total (boe/d) 6:1 Equivalent growth WTI (US$/b) HHUB (US$/mmbtu) FX rate (USD/CAD) EPS (f.d.) CFPS (f.d.) Net debt (mm) Net Debt/CF VALUATION P/CF EV/DACF EV/boe/d EV/2P reserves (YE13) P/(2P) NAV P/Risked Upside NAV
SRX-V
BUY $6.75 5,988 8,526 $0.42 $0.56
BUY
SRX-V Target $5.38 $6.75
109.6/113.5 $4.35/$1.70 $611 $653 $43 25% N/A
Umbach well economics move materially higher Changes in well completion techniques, including a near doubling in the number of per well fracs, have resulted in a 50% increase to initial production rates and a 100% increase to our risked per well NPV. Storm has 14 horizontal Upper Montney wells now on production at Umbach and given the improvement in production rates and drilling efficiencies, the company is clearly moving up the learning curve. We believe an improvement in the type curve of this magnitude positions Storm to increase its 2014 drilling activity and capital budget, which will ultimately drive a more robust production growth profile, as well as increase per well reserve bookings. From an investment standpoint, we feel this is an optimal entry point in the play lifecycle. Dont bet against this team Storm Resources is the fourth Storm company led by the current management team. Outside of being arguably one of the most credible management teams in the sector, this team has an excellent track record of value creation. To get a sense of how much value has been created, if you purchased a single share of Storm Energy Inc. (the first iteration) for $3.50 in 1997, that investment would be worth over $205 today, representing a 56% CAGR over the 16-year life of the Storm franchise. Umbach consolidator Through a combination of land sales and acquisitions, Storm has spent nearly $110 million acquiring 140 net sections in the greater Umbach area of northeast B.C. The company has a contiguous land position in what we believe is an up-and-coming liquids-rich Montney area. Given the number of offsetting producers, we foresee Storm continuing to expand its resource upside and look to it to further consolidate the area. Initiating coverage with a BUY rating and $6.75 target price There is no question, Storm trades at a premium to its junior gasweighted peers, but we feel this premium is justified given the management, growth profile, and resource potential on this high-quality asset base. We are initiating coverage of Storm with a BUY rating and $6.75 target price. Our target is based on a combination of our $8.45 Risked NAV and a 9.5x times 2015 EV/DACF multiple.
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2013A 996 15.8 3,637 61% $97.99 $3.73 $0.97 ($0.34) $0.28 $15.5 0.7x
2014E 1,247 28.4 5,988 65% $95.90 $4.50 $0.90 $0.09 $0.42 $42.5 0.9x
2015E 1,670 41.1 8,526 42% $95.00 $4.25 $0.90 $0.11 $0.56 $69.4 1.1x
9.6x 11.4x $72,613
12.9x 13.7x $109,053
9.7x 10.3x $79,754 $16.11 1.4x 0.6x
$6.00
12.0
$4.50
Close Price
9.0
Volume (Millions)
$3.00
6.0
$1.50
3.0
$0.00
May -13
Jul-13
Sep-13
Nov -13
Jan-14
Mar-14
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April 16, 2014

1) Upping the economics at Umbach change to well completions driving economics higher 2) Experienced management the fourth iteration of a proven model 3) Umbach consolidation own the consolidator
1) Upping the economics at Umbach two factors driving the step change in well performance
Over the past three years, Storms Montney well performance at Umbach has seen a material improvement. We believe there are two factors pushing the improvement in type well economics: 1) changes in completion methods, and 2) increase in the number of per well fracs. At the end of 2012, Storm completed its first well using ball-drop technology, a deviation from previous wells, which used perf-and-plug completions. In 2013, the company completed an additional 7 ball-drop wells, providing a sufficient sample to compare the results of the two techniques, and we have no hesitation in declaring ball-drop the unequivocal winner. Ball-drop vs. perf-and-plug completion techniques and comparative economics
5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 1 2 3 4 5 6 7 Producing month 8 9 10
In addition to the ball-drop switch, Storm has also been increasing the number of fracs used. The first five wells were completed with 7 to 11 fracs; this was upped to the 14-to16 range on wells 6 -9, and the most recent 5 wells have used 17 to 18 fracs. Publically available data are limited, but looking at average producing day rates over the first two months of production, the ball-drop completions with 17-18 fracs are outperforming the 14-16 frac ball-drops by 37%. This suggests the ball-drop type curve, presented above, is likely to move upward, as additional wells are brought on with a greater number of fracs.
mcf/d
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Isolating the impact of increased frac frequency

8,000 7,000
17-18 frac 14-16 frac 17-18 frac 14-16 frac ball-drop ball drop average average
IP 60 gas rates (mcf/d)
6,000 5,000 4,000 3,000 2,000 1,000 0
Source: geoScout, GMP
As youd expect, changes in completion techniques are materially improving well economics. Combining the impact of the ball-drop and the increased frac count, we find the new wells are generating double the NPV, compared to the perf-and-plug wells, and cut the payout period by more than half. Well economics: new completions vs. perf-and-plug wells
Initial wells GMP type curve
Well Perfromance
Change 58% 63% 59% 33% 100% 152% -53%
IP 30 (mcf/d) IP 30 (bbl/d) IP 30 (boe/d) EUR (mmcf)

Economics
2,678 94 540 3,300 $3.0 33% 32
4,244 153 860 4,400 $5.9 83% 15
Source: geoScout, GMP
2) Experienced management the fourth iteration of a proven model

President and CEO Brian Lavergne leads a highly capable management team, which has proven itself in previous iterations of the Storm franchise. Mr. Lavergne has been involved in all four versions of Storm, most recently as the President and CEO of Storm Exploration, which was sold to ARC Energy Trust (now ARC Resources) in 2010. Prior to that, he was the COO of Storm Energy Ltd., which was sold to Harvest Energy Trust in 2004. Similarly, CFO Donald McLean and COO Robert Tiberio both have roots tracing back to the Storm Energy days. In addition to the management teams pedigree, its interests are aligned with shareholders, as insiders hold 16.5% of fully diluted shares.
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History of the Storm franchise

August, 2002: Storm Energy Inc. split into Focus Energy Trust and Storm Energy Ltd. July, 2004: Storm Energy Ltd. acquired by Harvest Energy Trust August, 2010: Storm Ex ploration acquired by ARC Energy Trust
Storm Energy Inc.
Storm Energy Ltd.
Storm Exploration
Storm Resources
How much value has this team actually created? Through the four iterations of Storm, the management team has been highly successful in generating returns for shareholders. To quantify just how much value Storms management team has created, we developed a scenario whereby an investor purchased a single share of the original Storm franchise in 1997 and continues to hold it today. Further, we assume that with each business transaction, all non-Storm shares and cash consideration are converted into shares of the next iteration of Storm. Under this scenario, we calculate the original investment of $3.50 in 1997 would be more than $205 today, good for a 56% CAGR over the 16-year life of the Storm franchise. Storm value creation timeline
Initial investment: (1 share of Storm Energy Inc.) Oct, 1997 Storm Energy Inc. commences trading at $3.50/share Value of investment:
(4 shares of Storm Energy Ltd. @ $3.40)
$3.50
$13.60
Value of investment: (10.23 shares of Storm Exploration @ $2.79) June, 2004 Storm Energy Ltd. sold to Harvest Shareholders receive: 1 share of Storm Exploration Ltd. $4.35 in cash and RE share value
$28.54
Value of investment: (37.36 SRX shares @ $3.77)
Value of investment: (38.22 SRX shares @ $5.38)
$140.81
$205.62
August, 2002 Storm Energy Inc. re -organized Shareholder receive: 1 share of Storm at $3.41 1 share of Focus at $10.19
August, 2010 Storm Exploration sold to ARC for: 0.33 shares of Storm Resources $12.83 in cash and ARC shares
Current holding: 37.35 shares of SRX @ $5.38/share
56% CAGR
Presented on the following page is the share price performance for each of the four versions of Storm. Each company has earned at least a 15% return for investors, with two of the companies returning more than 300% over the course of their existence. Storm Resources, the current iteration of Storm, is up 43% from where it began trading in 2010 and is up 33% year-to-date in 2014.
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Storm share price performances

600% 500% 400%
Total return
Storm Energy Ltd. 15% Storm Energy Inc. 330% Storm Exploration 371% Storm Resources 43%
300% 200% 100% 0% -100% 0 24 46 68
Source: Bloomberg, GMP
Month
3) Umbach consolidation own the consolidator

We believe the greater Umbach and Nig areas of northeast B.C. will continue to see consolidation activity over the next 12-18 months, as the area offers liquids-rich Montney, which will help drive economics in the near term. The land is also positioned to provide feedstock for proposed LNG projects off the B.C. coast. Given their strong valuation and ability to access capital, we believe Storm will continue to look to increase its footprint in the area through consolidation, as there are a number of private and public companies with contiguous land bases offsetting Storms. As an example of recent consolidation activity, this past January Storm acquired Yoho Resources Umbach Montney assets for total consideration of $87.7 million (cash and shares). The deal included 29 sections of land, ~350 boe/d of production, and an additional 35 horizontal Upper Montney drilling locations. This acquisition increased the companys total land position to 140 net sections at Umbach. Storm ascribed a value of $61.5 million for the nine sections, which included the producing wells, reserves and drilling inventory, with the remaining $26.4 million allocated towards the remaining 20 net sections (equates to $4,700/acre).
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Storm map with offsetting operators
Black Swan
Petronas
Storm
Carmel Bay
Storm - from Yoho
Petronas
Paramount
ARC
Artek

There is no doubt Storm is priced at a significant premium to its peer group; the question is, is this premium justified? Our answer, in short, is yes. We find it very hard to bet against a team that has created so much value and is arguably following along the same successful path of its predecessor companies. The companys focus over the past couple of years has been to assemble a topquality asset base offering significant Montney gas upside. The market has rewarded the company for these efforts in anticipation of a phase of higher production and cash flow growth.
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Comparable valuations
Valuation
Production 2014E Name Artek Exploration Ltd. Advantage Oil and Gas Ticker RTK AAV (boe/d) 4,708 22,065 13,500 9,600 10,330 1,429 10,908 18,194 12,926 6,354 3,837 5,988 9,965 -40% % Gas 2014E (%) 63% 99% 86% 73% 71% 52% 72% 69% 85% 95% 81% 79% 76% 4% PPS Growth 2014E (%) 15% 13% 31% 6% 25% 336% 48% -12% 47% 14% -10% 14% 15% -4% D/CF 2014E (x) 2.1x 1.4x 1.4x 1.4x 2.0x 0.6x 0.0x 0.8x 0.8x -1.0x 1.2x 0.9x 1.1x -14% EV/DACF 2014E (x) 8.5x 7.5x 7.5x 5.4x 8.4x 7.9x 16.0x 10.0x 11.8x 6.4x 8.8x 13.7x 8.4x 63% 2015E (x) 6.5x 6.9x 6.4x 4.7x 7.1x 3.1x 11.4x 7.7x 9.9x 7.5x 9.9x 10.3x 7.3x 42% EV/boe/d 2014E $/boe/d $80,261 $60,663 $57,248 $54,395 $63,310 $91,047 $92,902 $91,005 $90,859 $43,378 $52,579 $109,053 71,785 52% 2015E $/boe/d $69,045 $52,123 $50,044 $47,134 $53,885 $37,988 $109,693 $70,244 $72,671 $43,245 $55,960 $79,754 54,922 45% 2014E (x) 6.7x 5.8x 6.1x 3.9x 7.0x 7.2x 15.5x 9.4x 11.2x 7.3x 8.0x 12.9x 7.2x 79% P/CF 2015E (x) 5.0x 5.2x 5.0x 3.3x 5.9x 2.7x 10.9x 7.2x 8.5x 8.6x 9.1x 9.7x 6.5x 48%
Cequence Energy Ltd. CQE Crocotta Energy Inc. CTA Delphi Energy Corp. DEE Donnycreek Energy Corp DCK Kelt Exploration Ltd. KEL NuVista Energy Ltd. NVA Painted Pony Petroleum PPY Pine Cliff Energy PNE Santonia Energy Ltd. STE Storm Resources Median SRX vs Median SRX

Storm recently released its 2013 reserve report showing total booked (2P) reserves of 40.5 mmboe weighted 81% to natural gas and representing 48% growth from 2012 levels. Storms 2P Future Development Capital (FDC), currently sits at $319 million, equating to roughly 3.0x our 2014 capital spending program not aggressive by any means. Approximately 50% of the companys bookings fall into the proved category, with 19% of total reserves currently producing. Based on our internally generated price deck, we estimate Storms current 2P NAV is $3.94/share, meaning the company is currently trading at 1.3x its 2013 NAV. Our estimated 1P NAV is currently $3.17/share. Details of our Base NAV can be found in the exhibit on the following page. Risked upside o Seeing as Storm is planning to direct substantially all of its capital spending to its Umbach Montney play, this is the only asset we include in the undeveloped upside component of our Risked NAV. Given the different well results achieved from North and South Umbach, we have run separate type curves for each area. On the current reserve report Storm has booked 35.6 net nonproducing Montney horizontal locations. Twenty of those locations are booked to its South Umbach land position, with the remaining 15.6 net locations booked on its north Umbach lands. Based on the 128 net locations in inventory at South Umbach, we see 108 net locations falling into the unbooked category. We also see roughly 46 net locations identified but unbooked on its North Umbach lands. These unbooked locations drive the unbooked upside portion of our Risked NAV. Based on our analysis, we see an additional $519 million in unbooked value representing $4.51/share. It is worth noting that we believe Storms current bookings and unbooked inventory are very conservative, as the booked reserves are only found in the Upper Montney and only across 8% of Storms 140 net sections of land.
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When we combine our Base NAV and Risked upside we calculate a Risked NAV for Storm of $8.45 per share. Details of both our Base and Risked NAV can be found below. Further to this, based on current trading levels, roughly 35% of the companys total unbooked inventory is accounted for in the current share price.
NAV Breakdown
2013 Assigned Reserves Proven Probable 2P Reserves Other Assets/Liabilities Land Value (302,000 acres @ $900 per acre) Net Debt Option Proceeds & Other Total 2P Net Asset Value Unbooked Upside Potential South Umbach Gas (HZ) North Umbach Gas (HZ) Total 2P NAV + Risked Upside Value $9.00 $7.50 $6.00 Reserves (mmboe) 20.8 19.8 40.5 BT PV@10% ($mm) $112 $70 $182 Value ($mm) $181 ($13) $10 $178 $360 $NAV/ Share $1.22 $0.77 $1.99 $NAV/ Share $1.98 ($0.14) $0.11 $1.95 $3.94 $NAV/ Share $3.25 $1.25 $4.51 $8.45
Net Locations 108 46 154
Net Risked Resource BT PV@10% (mmboe) ($mm) 94.9 $369 40.8 $142 135.6 $511 $872
$/share
$4.50 $3.00 $1.50 $0.00

Proved NAV 2P Value South Umbach Gas (HZ) North Umbach Gas (HZ)
Target price calculation

Consistent with the target price methodology for the majority of our companies under coverage, we utilize a combination of our Risked NAV and a 2015 EV/DACF multiple. For Storm, our $6.75 target price is based on a Risked NAV of $8.45 and a 2015 EV/DACF multiple of 9.5 times. This target multiple is above the average for the group and we feel this is justified given: 1) Storm management teams track record of success; 2) anticipated acceleration of production and cash flow given the material improvement in company type curves; and 3) significant amount of unbooked resource in place, in an up-and-coming liquids-rich Montney area.
RISKS TO OUR THESIS

Variable liquids rates: Even with the run-up in gas prices this winter, most Western Canadian gas plays continue to rely on liquids yields to float the economics. Storms Umbach wells are no exception, as the well economics would be challenging with dry
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gas. Fortunately, Storms wells contain significant quantities of NGLs, making the economics very compelling. However, wells drilled to date have exhibited considerable variability in liquids yields, with data from Storms 2013 wells showing initial condensate yields ranging from 15 bbl/mmcf to 60 bbl/mmcf. The average IP30 condensate yield in 2013 was 29 bbl/mmcf, which falls in line with our type curve assumption of approximately 30 bbl/mmcf. It is worth pointing out this does not include NGLs that are stripped out at the plant level. Storms 2013 wells gas and condensate rates
10,000 9,000 8,000 2.0 4.0 6.0 8.0 10.0 IP30 IP60 IP90 Condensate 60 12.0 14.0
70
6,000 5,000 4,000 3,000 2,000 1,000 1 2 3 4 5 6
40 30 20 10 -
Source: GeoScout, GMP
2013 wells
To provide an indication of how sensitive the economics are to varying condensate yields, we ran scenarios with a yield 10 bbl/mmcf higher and lower than our type curve, holding all other factors constant. As the following table shows, the varying yields can have a significant impact on economics, with the per well NPV shifting 25% above and 34% below the base case, respectively, in the high yield and low yield scenarios. The good news is, liquids yields are trending upwards, as the average liquids rate for the 2013 wells is 29 bbl/mmcf, compared to 15 bbl/mmcf in 2012 and 10 bbl/mmcf on pre-2012 wells. Sensitivity to condensate yields
IP30 gas IP30 condy Payout NPV (mcf/d) (bbl/mmcf) (months) ($m) Type curve High yield 4,200 4,200 30 40 18 12 5,722 7,129 Low yield 4,200 20 28 3,770
Source: GMP
Competition for assets: Part of our investment thesis relating to Storm is our belief the company will continue to seek further consolidation of the Umbach area of northeastern B.C. Given LNG facility operators may see this area as a potential supply basin for LNG feedstock, there is a distinct possibility of larger players looking to consolidate the area, ultimately making future acquisitions more competitive (and more costly) for Storm. Commodity pricing: Despite having an active hedging program, which has roughly 1/3 of its 2014 natural gas production hedged at $3.35/mcf, Storm remains exposed to commodity price volatility. With nearly 80% of corporate production weighted to natural
83
Condensate (bbl/mmcf)
Natural gas (mcf/d)
7,000
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April 16, 2014
gas, a decline in the commodity price would have a material impact on Storms ability to develop its Umbach and Horn River properties in a timely manner. If natural gas prices are not robust enough to support drilling activity, there is a risk Storm will lose value associated with some of its undeveloped land.

Storm Resources Ltd. is a successor company of Storm Exploration Inc., which was sold in August 2010 to ARC Energy Trust. As part of the transaction, approximately 117,200 net acres of land were spun off as the foundational assets of Storm Resources. The original assets included the majority of the companys current land position, with assets at Umbach, Horn River Basin, and Red Earth. Later in 2010, the company supplemented its Umbach real estate by adding another 17,100 net acres of undeveloped land. Also in the asset spinoff, Storm Resources retained ownership of 2.5 million shares of Storm Gas Resource Corp. and in January 2012, acquired the remaining outstanding shares of the company. The acquisition included 81,400 net acres of undeveloped land, primarily in the Horn River Basin. In March 2012, Storm Resources acquired Bellamont Exploration Ltd. for $96.9 million in cash and shares. The deal added approximately 2,000 boe/d of production and prospective oil land at Grimshaw and Grande Prairie in Alberta. Congruent with the companys current focus on Umbach, in January 2014, Storm acquired 29 sections of 100% working interest land in the area from Yoho Resources. The deal, which included 350 boe/d of production, was completed for $87.7 million in cash and shares. Since 2011, the company has grown production from essentially nothing to a 2013 exit rate of nearly 5,000 boe/d. We are forecasting growth of nearly 70% in 2014, with average production exceeding 6,100 boe/d, and estimate the company exiting 2015 producing greater than 10,000 boe/d. With a capital budget of $78 million in 2014, versus estimated cash flow of $46 million, we calculate a trailing 2014 D/CF of 0.9x.
CORE AREA OVERVIEW

Storms operations are focused on its B.C. Montney assets at Umbach; however, it also holds interests in the Horn River Basin and in the greater Grande Prairie area. At Horn River, Storm holds 123 net sections of land. The company has drilled two vertical wells and two horizontal wells in the area in an effort to gauge the commerciality of the play. Given the current gas price environment, the company has no further drilling plans in the short term. With all-in well costs of $12 to $14 million and little to no associated liquids, the company feels it needs a gas price of $5.00/mcf to justify further drilling activity. Given its clear focus on Umbach, we suspect the company would look to either exiting or farming out its interest in the area. In the Greater Grande Prairie area, Storm holds 40,000 net acres of land, from which it is producing ~1,100 boe/d (42% oil and liquids). The company has identified 10 to 20 light oil horizontal locations in the area and has a waterflood pilot underway. With a strong focus on its B.C. Montney assets, Storm currently has no plans to drill in the area and will use the cash flow generated by current production to further its Montney development. The area cash flows roughly $10 million per year.
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Storm Resources core area map

Q4'13 Production breakdown (boe/d) Horn River , 363
Horn River
Grande Prairie , 1,147 Umbach , 3,262
B.C.
Alberta
Red Earth Umbach
Grande Prairie
Source: Company reports, geoSCOUT, GMP Securities
Umbach Liquids-rich revenue driver Storms original holdings at Umbach were part of the spinoff package in the sale of Storm Exploration to ARC Energy Trust. In 2010, the company added approximately 27 net sections to its core area and followed it up with another 27 net section acquisition in 2013. Early in 2014, the company acquired 29 sections of Umbach land from Yoho Resources, giving them 107 sections (including 20 net sections at Nig) of 100% land and 33 net sections of jointly owned land with 60% working interest. In total, the company has spent $108 million to acquire 140 net sections of land, equating to a purchase price metric of $1,100/acre (roughly $700,000/section).
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Storms Umbach area map with drilling activity

SRX - 100% lands SRX - Yoho lands SRX - 60% lands SRX - Drilled wells SRX - Licensed wells Non-SRX Montney wells
Nig
North Umbach
South Umbach
Getting up the learning curve Since March 2010, Storm has brought 14 horizontal Montney wells on production at Umbach. Eight of the wells are on its 60% working interest North Umbach land, with the remaining 6 wells on its Umbach South land. In 2014, Storm plans to drill 10 horizontals at Umbach, all on its 100% working interest lands at South Umbach. The company anticipates drilling up to three horizontal Montney wells on the newly acquired lands through 2014. Production rates from the play and drilling efficiencies continue to improve, with the most recent wells (wells 10 to 14) being drilled in an average of 14 days, 30% faster than the initial 5 wells and posting average IP30 rates of 4.2 mcf/d, 50% above the production rates from the initial wells at Umbach North. We like the fact Storm used the lower working interest wells to get up the learning curve and improve operating efficiencies and is now applying this knowledge on its 100% lands at Umbach South. All of the 2014 drilling activity is scheduled to occur on the companys 100% lands. Type curve improvement Over the life cycle of the play, Storm has gone from using between 7 and 11 fracs to upwards of 18 on its most recent wells. Based on public data and company disclosures, it appears the most recent wells are delivering IP rates 50% above its earlier counterparts and, more impressively, they maintain this advantage 6 months out. In the Exhibit on the following page, we highlight the type curve improvement for each of the three sub-groups of Upper Montney wells. The groups are broken down as follows: group 1: wells #1-5, completed with 7 to 11 fracs at Umbach North; group 2: wells #6-9, completed with 14 to 16 fracs at Umbach North; and group 3: wells #10-14, completed with 17 to 18 fracs at Umbach South. To be conservative, we have
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removed the most prolific well to date (well 13) from our analysis. Data for this well shows producing day rates in excess of 9,500 mcf/d; however, production has been limited to only 11 producing days in each month. Due to the low number of producing days and the outlying production rates, we believe it is prudent to remove this well from our analysis for the time being. Comparing type curves from completion methods
5,000 4,000 3,000 2,000 1,000 0 HZ's 10-12, 14 HZ's 1-5 HZ's 6-9 Umbach type curve
mcf/d
5 6 7 Producing month
10
Economics comparing the initial wells with the new wells With the improvement in the initial rates comes a significant improvement in type curve economics. In the exhibit below we compare our economic forecasts for the initial wells and the most recent wells. Old versus new well economics
Initial wells
Well Perfromance
New wells 4,244 153 860 4,400 $5.9 83% 15
Change 58% 63% 59% 33% 100% 152% -53%
IP 30 (mcf/d) IP 30 (bbl/d) IP 30 (boe/d) EUR (mmcf)

Economics
2,678 94 540 3,300 $3.0 33% 32
As shown above, our estimates for the most recent wells show a significant improvement from the companys original wells. It is worth noting that we believe we are still conservative with our assumptions for the new wells, particularly our initial production rate, which sits at 4.2 mmcf/d, significantly below the new wells that have come on in the 5 mmcf/d range.
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April 16, 2014
CONCLUSION
We are initiating coverage of Storm Resources with a BUY rating and $6.75 target price. Based on the contiguous asset base, managements track record of value creation, and unbooked resource potential, we believe the company is positioned to deliver long-term value for shareholders. We fully acknowledge the company trades at a strong premium to its peers but ultimately believe investors should look past the near-term valuation multiples and focus on the fact that the company is led by a team with an excellent track record, is entering a high production and cash flow growth phase, and sits on a resource base that offers significant upside.
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APPENDIX A: STORM RESOURCES OPERATING AND FINANCIAL INFORMATION

SRX-TSX
Storm Resources
Rating Price Target Total Return
BUY $6.75 26%
Aaron Swanson, CFA - (403) 543-3563 aswanson@gmpsecurities.com Jordan McNiven - (403) 695-1401 jmcniven@gmpsecurities.com 2013A $3.94 $8.45 9.6x 11.4x $72,613 $12.72 $6.51 11.9 23.3 0.04 2013E ($25.3) $47.3 $21.9 $0.30 $0.28 ($71.9) $19.5 $0.0 ($52.4) ($31.1) $59.7 $0.0 $28.6 2013E $15.5 $15.5 0.7x 0.7x $65.0 24% 2013E 73.4 77.3 Reserves (mmboe) 20.8 19.8 40.5 2014E ----12.8x 13.6x $108,484 --------0.05 2014E $11.5 $34.9 $46.3 $0.43 $0.42 ($78.0) ($87.7) $0.0 ($165.7) $27.0 $92.4 $0.0 $119.4 2014E $42.5 $42.5 0.9x 0.9x $65.0 65% 2014E 107.4 77.3 BT PV@10% ($mm) $111.5 $70.4 $181.9 Value ($mm) $181.2 ($12.5) $9.6 $178.3 $360.2 BT PV@10% ($mm) $369 $142 $511 $872 2015E ----9.6x 10.3x $79,354 --------0.07 2015E $14.4 $48.7 $63.1 $0.58 $0.56 ($90.0) $0.0 $0.0 ($90.0) $26.9 $0.0 $0.0 $26.9 2015E $69.4 $69.4 1.1x 1.1x $65.0 107% 2015E 109.6 113.5 $NAV/ Share $1.22 $0.77 $1.99 $NAV/ Share $1.98 ($0.14) $0.11 $1.95 $3.94 $NAV/ Share $3.25 $1.25 $4.51 $8.45
Company Overview Price as of 04/14/14 52 week High - Low Fully Diluted Shares Outstanding Market Capitalization 2014E Net Debt Convertible Debentures Enterprise Value Commodity Price Assumptions WTI (US$/bbl) Edmonton Par (C$/bbl) WCS (C$/bbl) Nymex (US$/mcf) AECO (C$/mcf) Exchange Rate (US$/C$) Realized Prices Crude Oil (C$/bbl) NGL (C$/bbl) Natural Gas (C$/mcf) Production Hedged (%) Daily Production Crude Oil (bbl/d) NGL (bbl/d) Heavy (bbl/d) Total Liquids (bbl/d) Natural Gas (mmcf/d) Total Production (boe/d) YoY Production Change Income Statement ($MM) Oil & Gas Revenue Hedging Gains/(Losses) Gross revenue Royalties Operating Transportation Net Operating Income Expenses G&A Interest DD&A Other Total Expenses Earnings Before Tax Income Tax (Recovery) Net Income EPS (basic) EPS (diluted) Corporate Netback ($/boe) Revenue Royalties Opex Field Netback G&A Interest Expense Cash Taxes and Other Hedging Cash Flow Netback $50.00 $45.00 $40.00 $35.00 $30.00 $25.00 $20.00 $15.00 $10.00 $5.00 $0.00
$5.35 $5.50 - $1.94 113.5 $607.1 $42.5 $0.0 $649.6 2014E $95.90 $99.23 $85.60 $4.50 $4.63 $0.90 2014E $92.89 $75.89 $4.94 29% 2014E 344 903 0 1,247 28.4 5,988 65% 2014E $90.0 ($4.1) $85.9 $12.6 $18.7 $2.8 $51.7 $4.2 $1.3 $30.0 $0.0 $35.4 $16.3 $4.9 $11.5 $0.10 $0.09 2014E $41.17 $5.76 $9.87 $25.54 $1.90 $0.58 $0.00 ($1.86) $23.06 2015E $95.00 $97.78 $87.78 $4.25 $4.06 $0.90 2015E $91.78 $74.78 $4.56 9% 2015E 364 1,306 0 1,670 41.1 8,526 42% 2015E $116.2 ($0.3) $116.0 $16.3 $25.7 $3.1 $70.9 $5.0 $2.8 $42.7 $0.0 $50.5 $20.4 $6.0 $14.4 $0.12 $0.11 2015E $37.35 $5.23 $9.25 $22.87 $1.60 $0.91 $0.00 ($0.09) $20.36
2013E $97.99 $93.44 $78.01 $3.73 $3.17 $0.97 2013E $87.16 $70.29 $3.63 13% 2013E 485 511 0 996 15.8 3,637 61% 2013E $49.9 ($0.4) $49.5 $6.0 $14.4 $2.0 $27.1 $4.0 $1.2 $19.4 $27.9 $52.4 ($25.3) $0.0 ($25.3) ($0.36) ($0.34) 2013E $37.59 $4.55 $12.36 $20.68 $2.98 $0.90 $0.00 ($0.03) $16.80
Key Valuation Ratios Base Net Asset Value ($/share) Risked Net Asset Value ($/share) P/CF (x) EV/DACF (x) EV/Production ($/boe/d) EV/1P Reserves ($/boe) EV/2P Reserves ($/boe) 1P RLI (years) 2P RLI (years) DA Production per Share (boe/d) Cash Flow Statement ($Mm) Operating Activities Net Income Non-Cash Items CF from Operations (Adj.) CFPS (basic) CFPS (diluted) Investing Activities Exploration and Development Net Acquisitions Reclamation Fund/Other CF from Investing Financing Activities Change in Total Debt Shares Issued Dividends/Other CF from Financing Activity Leverage Net Debt Total Debt Net Debt-CF Total Debt-CF Credit Facility % Utilized Shares Outstanding ($Mm) WA Outstanding Shares (basic) WA Outstanding Shares (diluted) GMP Net Asset Value 2013 YE Assigned Reserves Proven Probable 2P Reserves Other Assets/Liabilities Land Value Net Debt Option Proceeds & Other Total 2P Net Asset Value Unbooked Upside Potential South Umbach Gas (HZ) North Umbach Gas (HZ) Total 2P NAV + Risked Upside Value
Net Locations 108 46 154
Net Risked Resource (mmboe) 94.9 40.8 135.6
9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0
0.08 0.06 0.05 0.04 0.03 0.02 0.01 0.00
2013e
2014e
2015e
Production Operating Netback Production per Share
89
Production (boe/d)
0.07
$/boe
April 16, 2014

Senior Executives and Board Members Biographies Management Brian Lavergne President & CEO Donald McLean CFO Robert Tiberio COO John Devlin VP, Finance Former President & CEO of Storm Exploration until sale to ARC Former VP, Production with Storm Energy Former VP, Finance and CFO of Storm Exploration Former Partner with Deloitte & Touche LLP Former COO of Storm Exploration Spet 10 years with Renaissance Energy and Husky Energy Previously Controller of Storm Resources and Storm Exploration Former financial consultant
Board of Directors Matthew Brister John Brussa Mark Butler Stuart Clark Brian Lavergne Gary Turnbull Grant Wierzba James Wilson
Director, Chinook Energy Vice Chairman, Burnet, Duckworth & Palmer LLP Business Consultant Chairman, Rock Energy See above Managing Partner, McCarthy Tetrault LLP Director, Chinook Energy Director, Private financial services company
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April 16, 2014

1 GMP
Securities L.P. and/or any of its group affiliated companies has, within the previous 12 months, provided paid investment banking services or acted as underwriter to the issuer. 2 The analyst has visited material operations of the company. The issuer and/or GMP clients paid all or a portion of the travel expenses associated with the analysts site visit to its material operations. 3 non-voting 4 subordinate-voting 5 restricted-voting 6 multiple-voting 7 The analyst who prepared this report has viewed the material operations of this issuer. 8 The analyst who prepared this research report owns this issuer's securities. 9 limited voting 10 GMP Securities L.P. owns 1% or more of this issuers securities. * The analyst is related to a member of the Board of Directors of the issuer, but that individual has no influence in the preparation of this report. **[Other disclosure] The information contained in this report is drawn from sources believed to be reliable but the accuracy or completeness of the information is not guaranteed, nor in providing it does GMP Securities L.P. (GMP) assume any responsibility or liability whatsoever. Information on which this report is based is available upon request. This report is not to be construed as an offer to sell or a solicitation of an offer to buy any securities. GMP and/or affiliated companies or persons may as principal or agent, buy and sell securities mentioned herein, including options, futures or other derivative instruments thereon. Griffiths McBurney Corp., an affiliate of GMP, accepts responsibility for the contents of this research subject to the foregoing. U.S. clients wishing to effect transactions in any security referred to herein should do so through Griffiths McBurney Corp. GMP will provide upon request a statement of its financial condition and a list of the names of its directors and senior officers. GMP. All rights reserved. Reproduction in whole or in part without permission is prohibited. 145 King Street West, Suite 300 Toronto, Ontario M5H 1J8 Tel: (416) 367-8600; Fax: (416) 9436134. Each research analyst and associate research analyst who authored this document and whose name appears herein certifies that (1) the recommendations and opinions expressed in the research report accurately reflect their personal views about any and all of the securities or issuers discussed herein that are within their coverage universe and (2) no part of their compensation was, is or will be, directly or indirectly, related to the provision of specific recommendations or views expressed herein. GMP Analysts are compensated competitively based on several criteria, including performance assessment criteria based on quality of research. The Analyst compensation pool is comprised of several revenue sources, including, sales and trading and investment banking. GMP Securities L.P. prohibits any director, officer, employee or Canadian agent of GMP from holding any office in publicly traded companies or any office in private companies in the financial services industry. All relevant disclosures required by IIROC Rule 3400, GMPs recommendation statistics and research dissemination policies can be obtained at www.gmpsecurities.com or by calling GMPs Compliance Department. The GMP research recommendation structure consists of the following ratings: Buy. A Buy rating reflects 1) bullish conviction on the part of the analyst; and 2) typically a 15% or greater return to target. Speculative Buy. A Speculative Buy rating reflects 1) bullish conviction on the part of the analyst accompanied by a substantially higher than normal risk, including the possibility of a binary outcome; and 2) typically a 30% or greater return to target. Hold. A Hold rating reflects 1) a lack of bullish or bearish conviction on the part of the analyst; and 2) typically a return of 0 to 20%. Reduce. A Reduce rating reflects 1) bearish conviction on the part of the analyst; and 2) typically a 5% or lower return to target. Tender. Clients are advised to tender their shares to a takeover bid.
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Oil & Gas

April 16, 2014

April 16, 2014

Launching coverage on 5 Montney producers

Painted Pony Blair/Townsend/Cypress Advantage Glacier

Source: Company reports, geoSCOUT, GMP

April 16, 2014

April 16, 2014

WHY THE MONTNEY MATTERS

April 16, 2014

Alberta Montney cross-section thickens and deepens to the southwest

Source: ERCB/AGS Open File Report 2012-06 (October 2012), GMP

High 645 3,344 2,430 113,274

April 16, 2014

525 350 175 0

Source: geoSCOUT, GMP

Montney horizontal production history

Horizontal well count

Liquids production (bbl/d)

25,000 20,000 15,000 10,000 5,000 0

Source: geoSCOUT, GMP

April 16, 2014

WHATS DRIVING THE ACTIVITY?

Montney gas producers and free condensate yields (IP60)

Source: geoSCOUT, GMP

April 16, 2014

% change 19% 48% 956% -89%

% change 60% 0% 116% -63%

Old 2,678 35 $3.0 32

% change 58% 3% 100% -53%

Old 3,176 0 $3.1 43

% change 62% N/A 28% -47%

IP 30 (mcf/d) Liquids yield (bbl/mmcf)

5,581 108 $16.6 6

BT NPV (10) ($mm) Well Payout (months)

Source: geoSCOUT, company reports, GMP

Source: National Energy Board, GMP

April 16, 2014

ADDING FIVE NAMES TO OUR MONTNEY PORTFOLIO

April 16, 2014

($mm) ($mm) (ratio) (months) (boe/d) (bbls/mmcf) (% ) (mmboe)

Source: geoSCOUT, Company reports, GMP

denotes new coverage

Ranking Montney plays

Payout Period (months) 30 25 Payout (months) 20 15 10 5 0 Payout Average

Source: geoSCOUT, Company reports, GMP

April 16, 2014

Average annual production (boe/d)

Source: Company reports, GMP Securities

NEW NAMESFROM 30,000FT

April 16, 2014

April 16, 2014

HOW THEY STACK UP

Production per share growth (% )

Source: Company disclosures, GMP

April 16, 2014

Comparative netbacks and cash costs

Cashflow netbacks ($/boe)

2014E Cash costs ($/boe)

Gas weight (%)

Source: Company disclosures, GMP

$120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $0

PNE STE CTA CQE AAV DEE CR

BIR RTK PPY NVA DCK KEL SRX