u

Evolution X
S EC U R I T IES
www.evosecurities.com

Irvine Energy (IVE) (remains as) Buy

Price/Target: 2p/7p 26 March 2008

IRVINE ENERGY 25/3/08

5.00
Predictability in Low cost, low risk growth plays
4.50

X Low cost, low risk onshore US conventional and unconventional plays

4.00

3.50 X Large lease position with multi-horizon targets with 10 year drilling inventory

3.00 X Current production to be boosted in March increasing cash flow

2.50
X Target of tripling 2P reserves in 24 months
2.00

Low risk reserve and production potential

1.50
2006 2007 2008
PRICE
PRICE REL. TO FTSE ALL SHARE - PRICE INDEX
HIGH 4.63 11/5/06,LOW 2.13 25/1/07,LAST 2.15
Source: 20/3/08
T homson Datastream
Focus on shallow drilling onshore US using modern 3D seismic techniques identifying
bypassed reserves in areas of known hydrocarbons. Wells have multi-horizon targets
minimising risk of dry holes. Production from these shallow conventional horizons
Reuters IVE
should generate cash flow to enable exploitation of larger, deeper non-conventional
Bloomberg IVE LN
tight gas reservoirs (Woodford/Caney/Chattanoona) and coal bed methane targets.
EVO Sector Oil & Gas
EVO Sub Sector Oil & Gas
Reserves, production and cash flow to ramp up rapidly
Listing AIM
No. of Shares 705m Low cost, with over 100 shallow wells and completions planned in next 18m based on
Free Float 86% 3D seismic interpretation of extensive acreage position in Kansas and Oklahoma.
Next News FY07 results April Company benefits from experienced management team and operating experience
through local partner (and investor). Reserves and importantly production and cash flow
Market Cap £15m likely to increase rapidly in 2008 – target is to triple 2P reserves and grow production to
Net Cash (FY07E) -£1.5 m 450 b/d oil and 6 mmcfd gas within 24 months
Pension Surplus/(Deficit) (E) £0m
Post Tax ROCE (E) 0% Financially secure and low risk
ROE (E) -7% Project IRRs and NPV/bbl are high. Mezzanine finance terms received for $50m facility
Net Debt/(Equity) (E) 9% to fund extensive programme outlined above until reserve base can sustain senior debt.
EBIT Interest Cover (E) 0x
Valuation of reserves/resources in the ground looks cheap compared to industry
transactions – currently averaging $2-3/mcf for PUD and PD reserves
Share price performance: Abs Rel to FTA
1 mth -17% -13% Our target price of 7p/share is based on existing 2P reserves, contingent resource
3 mths -4% 11% risked at 33%, and assumes full draw down of the $50m debt finance. However,
12 mths 1% 18% conversion of 159bcf of contingent resource to 2P reserves would increase the value to
25p/share at $2.40/mcf.
Keith Morris
Year end Dec 31 2006A 2007E 2008E 2009E 2010E
+44 (0) 20 7071 4408
Sales (£m) 0.0 0.0 4.1 16.5 21.0
keith.morris@evosecurities.com EBITDA (£m) -0.4 -1.2 2.0 13.1 16.8
EVO PBT (£m) -0.2 -1.1 -0.3 7.8 12.5
EVO Securities makes markets in Irvine Energy EPS (p) -0.1 -0.2 0.0 1.1 1.3
DPS (p)
EVO Securities is broker and/or advisor and has in
CFPS (p) -0.2 -0.2 0.3 1.9 2.4
the last twelve months acted as broker and / or
P/E (x) - - - 2.0 1.6
adviser or provided investment banking services,
EV/EBITDA (x) -4.2 -9.3 7.1 0.9 0.9
for which it has received compensation or is FCF Yield (%) -7.8 -65.8 -85.5 -45.8 -19.2
expecting compensation within the next three Yield (%) - - - - -
CFM (x) - - 7.4 1.2 0.9
The company has reviewed a draft of this research
EV/Barrel ($/Barrel) 2.4 - - - -
note and factual changes have been made.
2P Reserves (MMBOE) 1.3 - - - -

Under the Markets in Financial Instruments Directive and the Financial Services Authority’s Conduct of Business Rules, this document is a marketing communication and has not
been prepared in accordance with legal requirements designed to promote the independence of investment research. Although it is not subject to any legal requirement
prohibiting dealing ahead of the dissemination of investment research, Evolution Securites Ltd upholds this standard through its internal systems and controls.
 March 08

Investment case
X Onshore US conventional and non-conventional plays

X Large lease position in US Mid-Continent – Oklahoma, Kansas

X Wells with multi-targets – minimising risk of dry holes

X Shallow, low cost drilling with easy access to rigs

X Active drilling programme - newsflow

X Rapid development and early cash flow

X Modest current production – to grow rapidly as wells come on stream in 2Q08

X Project IRRs and NPV/bbl are high

X Targeting a large boost to reserves in 18m as contingent resource are moved

to 2P reserves

X Work with local partner/operator, who is a shareholder in Irvine

X Experienced technical management team with local knowledge

Shallow targets to produce short Irvine’s strategy is to develop and produce shallow conventional reserves in multiple
term cash flow reservoirs in existing prolific oil & gas basins onshore USA. Once in production the
company will focus on deeper non-conventional resources which are becoming a
“hot property” in the US.

3D identifying previously missed The company uses 3D technology to pinpoint oil & gas targets which have been
prospects missed by many small, resource-poor operators using only 2D data.

The opportunity set is best illustrated by the coverage of the states by 3D seismic.
Whilst coverage is around 60-70% in productive basins in Texas, in Kansas the
coverage is only 2%, leaving huge potential for finding attractive missed
opportunities. Projects are low cost and have rapid payback due to access to
existing extensive infrastructure.

Deep potential for non- The acreage position built up and held through the development of shallow
conventional shale gas – a hot conventional targets has deeper potential for non-conventional shale gas and coal
property in the US bed methane gas, which is being successfully targeted by larger independents such
as Devon, Chesapeake and Newfield.

Irvine management has extensive technical and drilling experience in shale gas
plays.

The company has teamed up with unquoted Metro Energy Group which has
extensive land management and operational capability as well as experience in
shale gas having worked with Devon Energy in Oklahoma.

Project IRRs and NPV/bbl are high. Valuation of reserves/ resources in the ground
looks cheap compared to industry transactions – currently averaging $2-3/mcf for
PUD and PD reserves.

Currently the company has a core plus risked EMV of almost 7.0p, or 3x the current
share price - even assuming the full $50m finance in drawn down. This is our initial
target price.

If the current contingent resource of 159bcfe net to Irvine were converted into 2P
reserves, in our view they should attract a value of around $2.4/mcf giving a value of
$380m. Add around $20m for existing 2P reserves and conservatively deducting a
full $50m for the debt finance (which we feel is unlikely to be fully drawn down),
gives a company NPV of $350m or 25p/share on a fully diluted basis – or 10x the
current share price.

2

Large but focussed acreage
portfolio
March 08
Portfolio
Irvine has a large acreage position focussed in Kansas and Oklahoma adding up to
166,500 gross and 11,250 net acres. As mentioned above, the focus is on
established hydrocarbon basins where drilling success rates are high, using modern
3D seismic to pick up prospects missed by older 2D surveys. Having developed
these shallow resources (see stratigraphic column below), the company is focussed
on deeper non-conventional tight shale gas reservoirs which are already big
business in East Texas and Arkansas.
Summary stratigraphic column showing conventional and non-conventional
targets
500 to 2200 feet
Shallow Coals
Conventional Sand
500 to 3200 feet
Intervals
Caney & Woodford Shales
3000 to 3600 feet
Deep Oil
Targets
3500 to 5000
feet
Source: company
Irvine currently has three areas of focus in the Mid continent US. These are shown in
the map below and then described in detail.
3
 March 08

Location of projects – onshore USA

Niobrara Project
4,490 acres

Kansas Project
~112,000 acres

Oklahoma
Project
~50,000 acres

Source: Company

South Kansas (Irvine 75% WI - NRI 60%, Metro 25%)

Irvine has an AMI with partner Metro over 7 million acres covering the Chattanooga
Shale unconventional gas resource in Kansas. Irvine aims to exploit the conventional
oil and gas reservoirs, reducing overall project risk and generating early cash-flow
while testing the gas potential of the Chattanooga Shale. Irvine has first mover-
advantage in this area which is believed to have significant gas potential.

Large acreage position The current acreage position covers 112,000 gross acres. Leases are held for three
years with a 3 year renewal on most leases.

Up to twelve conventional production intervals have been known to produce from

existing wells in the area at depths of ranging from 1,500-5,000 ft (500-1,525 m)
with three, the Arbuckle (oil) , the Mississippian (gas) and the Pennsylvanian (gas),
being prolific producers .
The first exploration objectives are expected to be targeting the Arbuckle
Dolomites in old structural highs which can easily be identified on seismic and
where bypassed oil may remain. These are either undrilled or previous wells
abandoned when the oil price was low.

Three 3D seismic surveys to Three 3D seismic cubes are being shot covering around 51 square miles. The
pinpoint drilling targets seismic programme ($1.5m) is being funded by Irvine as part of the farm-in
agreement.

The Rock 3D cube shoot (8 sq miles) is complete, several prospects have been
generated and the first well should be drilled in March 08.

The Ayres 3D is in progress (12 sq miles) with the Udal 3D (24 sq miles) to follow in
2Q08. Following processing and interpretation, drilling on prospects within these
cubes is likely in 2H08

Management expect that there will be a similar level of prospect generation to

Oklahoma, even though the lease acreage is more than twice the area.

Within the area there is a great deal of infrastructure already in place with gas
transportation pipelines less than two miles from any prospect area, and in most
cases less than 0.5 mile.

4
 March 08

Flow rates, reserves and approx. cost per well

Formation Initial Flow rate Reserves per well Cost per well

Arbuckle (Oil) 60 BOPD 50 MBO US$ 625,000

Miss/Penn Gas 350 MCFD 400 MMCF US$ 575,000

Source: Company

Unconventional exploration – the Chattanooga Shale

Shale gas potential to be explored The Chattanooga Shale is an early Mississippian (Devonian) deposit that is a lateral
extension of the proven Woodford Shale which has been drilled successfully in
Arkansas (see Appendix 1 for players in Woodford Share) and is the focus of
attention within the Arkoma basin in Oklahoma.

Data from the Kansas Geological Survey shows the Chattanooga Shale varies in
thickness from about 50ft to over 200ft in some parts of the AMI and generally
thickens from the east to the west. The formation is also seen to be deeper towards
the south-west, lying below 4,000 ft. Comparing the thickness of the shale and the
thermal maturity which is recorded as late-oil in overlying Mississippian sediments,
the western portion of the AMI is expected to be the most prospective.

The shale has yet to be exploited in South Kansas but one well has been tested
close to the SW corner of the AMI. The carbon content of the shale is lower than in
other areas giving a lower resource in place per acre, but the shallower depth
makes the economics attractive. The company has modelled potential gas rates and
reserves based on correlations with the Barnett and Fayetteville Shales in adjacent
basins.

Drilling in 2008 is key to establishing that the conditions of the shale are suitable for
shale gas development and commercial production.

Assuming the normal industry standard of 80 acre well spacing, Irvine's acreage
would allow for as many as 1400 well locations. Realistically, only part of the
acreage is likely to be available, generating up to 250 well locations.

Flow rates, reserves and approx. cost per well

Formation Initial Flow rate Reserves per well Cost per well

Vertical 300 MCFD 200 MMCF US$ 450,000

Horizontal 725 MCFD 500 MMCF US$ 900,000

Source: Company

For a vertical well, about half of the cost is the actual drilling and completion – and
about half for the hydraulic fracture stimulation treatment (fraccing).

Forward Programme
X Complete seismic and drill 12 conventional wells over the next 18 months -
targeting conventional shallow oil targets (2-5000ft). Wells can be drilled and
completed in around 7 days, and typically produce around 50 b/d paying out in
around 3 months.

X First well in the Rock 3D area to spud in March 2008.

5

Low risk shallow gas development
Area already partly explored by
Devon
Combination of attractive shallow
conventional targets and shale gas
and CBM
March 08
X Test the thermal maturity and TOC content of the Chattanooga shale to
quantify the size of the likely gas resource. Drilling expected in 2008. It is a key
element of Irvine’s work program to demonstrate that the conditions of the
shale are suitable for shale gas developments with commercial production
potential.
North Kansas - Niobrara Chalk project. (Irvine 50%WI), Metro 50%).
Irvine has purchased a 50% working interest in 4,490 acres of a shallow biogenic gas
(99pc methane 960btu) development located on the eastern side of Denver
Joulsberg basin (the DJ basin) in northwest Kansas. Named after the target
reservoir formation, the Niobrara Chalk, the play has been penetrated by over 300
wells in the local area and is extremely active, with Berry Petroleum Company (a
NYSE listed company) having recently acquired over 400,000 gross acres around
Irvine's AMI.
A major interstate gas pipeline 0.5miles north of the acreage is being tapped for
export of the gas. 20 vertical wells already drilled at minimal cost to Irvine ($0.5m)
to a depth of only 1500ft, and have been tested at flow rates of 50 mcfd. Recovery
factors of up to 60% are achieved from this porous chalk formation, with typical
reserves of 175mmcf/well, based on a 40 acre well spacing.
These wells should be on stream before the end of 1Q08 after finalising access to
water disposal (all these wells produce associated water). 54 more wells are planned
on proven undeveloped sites (PUDs), with another 43 probable undeveloped
locations.
Wells are low cost, being air drilled with light drilling rigs (rather than using
conventional mud systems) and can be completed in 1-1 .5 days.
Proved undeveloped reserves can be assigned to all 74 wells once the first 20 are
producing.
Oklahoma (Irvine 50%, Metro 50%)
The Oklahoma AMI project comprises approximately 50,000 gross acres in the
contiguous Okmulgee, Okfuskee, McIntosh and Hughes Counties on the north
eastern flank of the Arkoma Basin.
Irvine has recently purchased a 50% participation in 50,000 acres from partner and
shareholder Metro for a consideration of $12m. Devon Energy and Metro shot a 3D
seismic survey and began a six well drilling program in 2005 to identify conventional
oil and gas reservoirs and acquire and appraise scientific data on the Caney and
Woodford Shales. Though the data generated indicated that the area has the
potential to develop commercial gas, the block size was not material to Devon
Energy (Mkt cap $44bn) which is concentrating on larger contiguous acreage
positions, notably in the deeper areas of the Arkoma Basin to the East. Devon sold
its interests in Oklahoma back to Metro which provided Irvine with the opportunity
to buy into the leases. Metro will bear its proportion of the seismic and drilling
programmes going forward.
Overall the area has approximately 12 conventional oil & gas reservoirs which are all
productive in the region from 1500ft to 4500ft in the Arkoma basin in East Central
Oklahoma. A large shale gas resource in the Caney and Woodford shales is found
across the entire acreage position from 2800-4000ft and finally a coal bed methane
(CBM) resource in the Hartshorne and other coals at 500-2200ft.
6
 March 08

Schematic Illustration of Conventional Traps and Continuous (Shale) Gas

Accumulations

Schematic Illustration of Conventional Traps and

Continuous (Shale) Gas Accumulations

Land surface

Conventional Structural
Coal bed Gas oil and gas accumulation
Conventional Structural
gas accumulation
Conventional Stratigraphic
gas accumulation

Continuous gas
accumulation
such as
Chattanooga shale

Tens of Miles Adapted from USGS

Source: Company

Conventional oil & gas

This acreage includes Irvine’s current net production of 0.6mmcfd.

4 new wells are currently being completed. At this stage maximizing the efficiency
of the field operations is one of the Company’s top priorities along with operator
Metro, as additional wells are bought on and production from existing wells
increases.

Low risk conventional targets The long term drilling inventory is based on 3D seismic data with targets identified
identified by 3D by Schlumberger. 33 wells are planned in the next 18-24 months, based on Irvine's
interpretation of the 54 square mile 3D seismic shoot.

Prospects have multiple potential pay zones. The main target horizons identified for
oil are the Booch, Hunton, and Red Fork Formations. The Gilcrease, Cromwell,
Union Valley, Jefferson and Wilcox Sands have been identified as targets for natural
gas.

Based on Irvine's data, we have projected initial flow rates, anticipated reserves per
well and anticipated cost per well as follows:

Flow rates, reserves and approx. cost per well

Formation Initial Flow rate Reserves per well Cost per well

Vertical 300 MCFD 200 MMCF US$ 450,000

Horizontal 725 MCFD 500 MMCF US$ 900,000

Source: Company

7
 March 08

Flow rates, reserves and approx. cost per shallow well

Formation Initial Flow rate Reserves per well Cost per well

Oil 40 BOPD 45 MBO US$ 700,000

Gas 375 MCFDE 430 MMCFE US$ 650,000

Source: Company

Shale gas potential

The shale gas potential of the area The Caney and Woodford Shale is present over the entire area, being thicker in the
is significant south east. Both horizontal and vertical wells on Irvine's Caney and Woodford shale
acreage have been correlated with analogous data from the Barnett and
Fayetteville shales.

The Caney Shale is laterally contiguous with the Fayetteville Shale in Arkansas,
where 270 wells are currently producing and another 90 are waiting on completion.

In economic terms, the Woodford Shale is now second only to the Barnett Shale
and management have indicated that in areas just south of the Company's acreage
position the Woodford production rates are better than those of the Barnett Shale.
It is expected that Irvine's Woodford wells will have lower production rates because
of the lower gas in place. However, significantly lower drilling costs due to shallower
depths make the overall rates of return attractive

There are currently more than 200 producing horizontal Woodford wells across this
basin, which contains Irvine’s acreage, with approximately 40 rigs operating.

This data has enabled the company to generate estimates of recoverable gas and
reserves.

Estimates suggest the gross gas in place in the Irvine acreage is 11.2tcf, with a
potential recoverable resource of 797bcf gross, 159bcf net to Irvine.

Using industry standard 80 acre spacing, and assuming around 2/3rds of the
acreage is accessible, Irvine can accommodate approximately 400 drilling locations.
Rates and reserves for vertical and horizontal wells are as follows:

Flow rates, reserves and approx. cost per shallow well

Well type Initial Flow rate Reserves per well Cost per well

Vertical 480 MCFD 350 MMCF US$ 900,000

Horizontal 1250 MCFD 950 MMCF US$ 1,800,000

Source: Company

Coal Bed Methane

Additional upside in coal bed The Hartshorne Coal and adjacent seams are being exploited for coal bed methane
methane resource yet to be (CBM) in adjacent acreage to the east and north of Irvine’s acreage and although
quantified only 5ft thick, is a prolific producer with none of the de-watering problems
experienced in other countries.

To date none of the potential for the CBM over the Oklahoma area has been
assessed in terms of contingent or prospective resources.

8
 March 08

Acreage portfolio
We do not usually comment on acreage portfolios as in general terms there is no
real value to acreage unless there is prospectivity – i.e. you can hold a huge acreage
position but if it is “moose pasture” (i.e. not prospective ), it has little value. In the
US, where shale gas trends are found over entire basins, the acreage holding is
more material.

Also, the process of obtaining a meaningful acreage position in prospective areas in

the US, through the gathering of fragmented surface and mineral leases is a long
and complex business. Therefore, a large acreage position is an important asset.

Acreage portfolio gives drilling Also – given the extensive opportunities in the stratigraphic column – the size of the
potential for 10 years acreage position is important in giving the company the potential to drill for 10
years without having to add to the portfolio.

Interestingly Chesapeake (which operates 140 rigs) in their latest results noted a
similar acreage/ drilling position with a 10 year inventory of drilling projects.

Metro relationship
Local partner gives local In our view, its is important for onshore US companies to have operational expertise
operational expertise on the ground and Irvine achieve this through its relationship with Metro Group – a
privately held oil & gas company founded in 1999 headquartered in Tulsa,
Oklahoma. Metro has around thirty five employees (including contractors). The
company currently operates in Kansas, Louisiana, Oklahoma and Texas.

All of Irvine’s current leases have been acquired from or through Metro which acts
as operator. We also note that the owners of Metro have a significant equity
interest in Irvine (40m shares with a further 35m shares in deferred consideration on
performance terms).

Metro believes it has strong working relationships with various service companies in
the shale-gas production arena which has been demonstrated through its successful
operations and drilling in Kansas and Oklahoma to date, (where it was working with
Devon Energy). We believe that the developments of the last year show that Metro
has also a strong working relationship with management at Irvine which has been
successful to date.

Operational capability – costs etc

Equipment readily available Unlike many parts of the world, the mid continent US is an established oil and gas
province and has an extensive infrastructure from seismic and rigs through to well
equipment compressors, tanks and pumps.

The company notes that there is plenty of availability of drilling rigs capable of
drilling to 5000ft. Rigs are available readily with notice periods as short as one
week.

Drilling costs
Drilling costs are modest Again – from a world where deep water offshore wells can cost anything up to
$150m each, the costs of drilling in the onshore US are remarkably modest.

Shallow Niobrara wells can cost around $150,000 each

Conventional targets in Oklahoma can cost around $400,000 each

Non-conventional/ horizontal fracced wells can cost up to $1.75m

9
 March 08

Illustrative drilling costs for play types in Irvine’s acreage

Conventional Conventional Vertical Horizontal Vertical Horizontal
Oil Gas Shale Shale gas CBM CBM
gas

Drilling & $400,000 $375,000 $900,000 $1.75m $200,000 $750,000

completion
cost

Source: Company

Timing
The rapid completion and hooking up of wells to production is another feature of
this area.

Wells put on stream rapidly – often Once wells have been completed, they can be hooked up to the extensive existing
within weeks infrastructure in a matter of days or weeks. Flow lines connecting wells to export
pipelines are short, and can be installed rapidly. This of course leads to rapid cash
flow and early payback.

Management Team
Experienced technical team Irvine has a small but experienced technical team. Note that on the ground the
company relies on Metro for operational staff (see above)

Aaron Close - Managing Director

Over 10 years experience as geoscientist in North American oil and gas sector 2002
joined EnCana Corporation, an industry leader in unconventional natural gas and
integrated oil sands development, as a Geoscientist 2005 joined Kerogen Resources
Inc. as Shale Supervisor and Geoscientist with extensive experience in the North
American oil and gas sector, notably with Encana, a leader in unconventional gas
resources and at Kerogen Resources where he undertook evaluation of the Barnett
Shale and oversaw extensive drilling.

Chuck Bingle - Technical & Operations Manager

Over 28 years engineering experience in various conventional and unconventional
projects worldwide. Former President of Restech Houston. Performed multi-
disciplined evaluation projects for dozens of E&P companies 2005 Engineering
Manager of Kerogen Resources Inc. Lead team responsible for acquiring 35,000
acres of land in Fayetteville shale play in Arkansas and for acquiring 68,000 acres in
the Bakken Shale in North Dakota.

Doug Manner (Chairman)

Over 30 years engineering experience in the oil and gas industry, principally in US
Extensive corporate experience in oil & gas arena Currently CEO of Westside
Energy Corporation, an US listed shale gas energy company with 65,000 acres in
the Barnett Shale area in Northern Texas and production of 3 mmcfd. Director of
Cordero Energy Inc., Avant Garde Energy Corp. and Rio Vista Energy Partners

10

Reserves report is incomplete and
does not include resources for
non-conventional shales or CBM
potential
Production is targeted to rise
significantly over the next 2 years
March 08
Reserves
Independent assessment of the reserves is an ongoing process, and will be carried
out regularly (probably every six months by Netherland and Sewell).
At the end of Dec 2007 the company had 2P reserves of 8bcf of gas (6bcf 1P),
mainly attributed to the Niobrara project. At present there is no reliable estimated
of 2P reserves for Oklahoma.
The company has another 159 bcf of contingent resource. The current drilling
programme is designed to move contingent resource to 2P reserves.
Note that the resource base does not contain any numbers for the Woodford or
Chattanooga shales or the CBM potential.
The company has a target of tripling reserves over the next 24 months.
Production
Modest production of 0.8mmcde should rise to around 2mmcfde with the
completion of the development programme originally scheduled for 2007. 60 wells
are planned for 2008.
The target for next 24 months is to increase production to 6mmcfd and 450 b/d oil.
Timeline
X Dec 2005 – admission to AIM, raising £3m at 3p/share
X April 2006 – JV with Metro Energy for Kansas
X July 2006 – acquired 75% working interest in 30,000 acreas in Kansas
X August 2006 - £4.32m raised at 3.5p/sahre
X Nov 2006 –completed purchase with additional acreage, doubling the project
acreage
X Feb 2007 – Aaron Close and Doug Manner appointed to the board.
X March 2007 – Chuck Bingle appointed as Technical and Ops manager
X July 2007 – agreement with Metro for Oklahoma AMI and Niobrara.
X August 2007 - £1.5m raised at 2.25p
X September 2007 – Niobrara purchase completed
X December 2007 - £4m raised at 2p/share, plus an additional £625,000 also at
2p/share.
X January 2008 – Oklahoma acquisition completed
X Dec-Jan – 3 wells drilled in Oklahoma.
Forward programme
X Re-complete 10 Oklahoma wells to bring into production
X Drill 33 wells in Oklahoma
X Drill 12 conventional wells in Kansas
X Tie-in 20 Niobrara gas wells (end 2007) and drill 30 more wells in 2008-02-18
Process seismic in Kansas and generate prospect inventory in 4Q07
11

Strategy is low risk, steady reserves
and production progression
Mezzanine finance available until
reserve base sufficient to underpin
longer term bank debt
Production sold at marker prices or
above
March 08
X Further 3D seismic programmes in Kansas and Oklahoma to expand the
prospect inventory
Strategy
As mentioned earlier, the strategy of the company is very simple – drill, produce
generate cash flow, increase reserves. The companies existing portfolio can sustain
this internal growth model for up to 10 years.
In the medium term the company has the option to monetise one of more of the
projects – there is a sophisticated asset market in the US and the company can take
a view on the value proposition and potential risk/reward for some of all of the
companies’ assets.
Financing
Cash flow
Currently Irvine has modest cash available, as equity raised in 2007 and early 2008
has been used to purchase the acreage described above and carry out seismic and
drilling to date.
Although Irvine has started to generate revenue from production which will ramp
up during 2008, it will require additional finance in the short term to drill the wells in
the programme to boost reserves and production and to hold the large acreage
position.
Irvine as received terms for a $50m mezzanine debt facility from a specialist oil &
gas finance provider based on extensive technical due diligence and asset portfolio.
In addition, around $4 million is required to repay an outstanding loan note due in
April 2008.
The mezzanine finance is expensive – likely to be around 12% with kickers, and is
seen as a bridge finance only until such time as the reserve base has grown
sufficiently to allow replacement with a senior secured asset-backed bank debt.
Irvine estimates that the current drilling plans should only see around half of the
facility being utilised – the remainder of spending being financed out of operating
cash flow as production and revenue increases.
Revenue/ Pricing
Oil and gas are sold locally into local transportation systems and trunklines. Realised
oil prices are close to WTI (as the oil is light and sulphur free), whilst gas prices in
the region are close to the Henry Hub gas price or slightly better as the gas is of
high calorific value – (1,100-1,250 BTU). The gas is generally moved eastwards to
the energy hungry markets of Chicago and the east coast.
The area has an extensive gas gathering and transport system with several existing
taps into various local gas transportation systems. This enables Irvine to bypass any
local bottlenecks or problems and achieve the most efficient route to market. The
access to more than one pipeline system is important in ensuring that full market
prices for gas are achieved (unlike the Rocky Mountains for example).
Per barrel capex and opex
Based on the costs of drilling etc. outlined above, we estimate that the capital cost
of reserves is around $18/boe with operating costs rather less at around $10/boe.
12
 March 08

Valuation
Based on typical economics outlined above, the company has developed some
illustrative valuation metrics for the range of projects which can be generated in
Irvine acreage.

Project IRRs are high using Even on oil price assumptions in the $70’s, rather than today’s $100/bbl, the oil
conservative price assumptions projects unsurprisingly produce the highest NPV and IRR. For gas, the IRR’s look
attractive using gas assumptions in the $6/mcf range, rather than the current
$9/mcf.

Estimates of typical well economics for Oklahoma & Kansas (100%

WI, 78% NRI)
Convention Convention Vertical Horizonta Vertical Horizont
al Oil al Gas Shale gas l Shale CBM al CBM
gas

Drilling & $400,000 $375,000 $900,000 $1.75m $200,000 $750,000

completion
cost

IRR 179% 151% 55% 78% 26% 46%

NPV/bbl $28/bbl $2.40/mcf $1.0/mcf $1.5/mcf $1.25/mcf $1.63/mc

f

Source: Company, EVO Securities

US onshore market is quite sophisticated with an active market for all types of
assets.

Therefore, one can use these transactions to derive a $/bbl or $/mcf valuation
based on what the industry itself is willing to pay. Recent transactions in areas
similar to that of Irvine have taken place at price of $2.5 to $3/mcf for 1P/2P
reserves in the ground (PUD) and producing (PD).

Recent acquisition parameters

Seller Buyer Property Daily Proved Sales Price $/ MCFD $/ MCF
Production Reserves proved

(MMCFD) (BCF) (MM$)

Chesapeake MLP Appalachian 30.0 235 600 20,000 2.55

Basin

Petrogulf Pioneer Raton Basin 10.0 95 205 20,500 2.16

Corp Natural
Resources

St Mary South Texas 9.2 95 153 16,641 1.61

Land &
Exploration

Newfield Constellatio Cherokee 10.0 45 128 12,800 2.84

Exploration n Energy Basin

Penn Arkoma 3.1 18.8 48 15,483 2.55

Virginia Basin

Source: Company

Shale gas is more predicable – as it is widespread and not constrained by the

presence of structural traps. Transactions are typically in the $0.80 to $1.00mcf
range for P1/P2 reserves in the ground.

Conversion of 159bcf of contingent resource to 2P reserves would be worth

27p/share at $2.40/mcf.
13

NAV is incomplete until full
reserves report available
Conversion of 3P reserves to 2P
has major ratcheting effect on NAV
March 08
Net Asset Value and risked EMV
Until we get a full independent reserves report, our NAV is incomplete, but will give
a flavour of the potential value.
Also, at the current stage of exploration/development in Kansas, seismic data is still
being gathered and firmed up, and prospect inventories evaluated. Data from the
Kansas Geological survey indicates that with the methodologies being used (3-D
seismic over multiple target reservoirs), success rates of 75% are likely. However
being conservative, we have risked the contingent resource at 1 in 3, until such time
as a full prospect inventory is gathered.
NAV EMV
$m p/share
Shares in issue (fully diluted) 704.6m
Current 2P reserves (8bcfe at $2.4/mcf) 19.2 1.4
Contingent resource (159bcf at $2.4/mcf 126 9.0
risked at 1 in 3 )
Mezz finance – assume full drawdown -50 -3.6
Core plus risked EMV including debt 95 7.0
finance
Source: EVO Securities
On this basis, currently the company has a core plus risked EMV of almost 7.0p, or
3x the current share price - even assuming the full $50m finance in drawn down.
This is our initial target price.
As mentioned earlier, the drilling programme is designed to move contingent
resources into the 2P category. With a continuous drilling programme and a six
monthly review of reserves by Netherland and Sewell, we would expect the reserves
numbers to show a steady improvement over time which will increase both the Core
NAV and the Core plus risked EMV.
To illustrate the upside potential of the portfolio, we can calculate the value of the
unrisked portfolio.
If the current contingent resource of 159bcfe net to Irvine were converted into 2P
reserves, in our view they should attract a value of around $2.4/mcf giving a value of
$380m. Add around $20m for existing 2P reserves and conservatively deducting a
full $50m for the debt finance (which we feel is unlikely to be fully drawn down),
gives a company NPV of $350m or 25p/share on a fully diluted basis – or 10x the
current share price.
(Note that the current estimate of contingent resources does not include any
contribution from the coal bed methane potential or the Chattanooga shale in
Kansas.)
14

Tight gas is a basin-wide resource
not constrained by structural traps
March 08
Appendix 1
Unconventional gas
Most oil and gas production has come from petroleum fluids trapped in
conventional structural traps in porous/ permeable rocks known as reservoirs.
Recently, technological developments together with a large commodity price rise
has meant that companies can economically produce gas directly from some of the
gas source rocks themselves, typically organic-rich shales and coals.
Under the right circumstances, gas has been found in sufficient volumes and been
producible at rates which make these “unconventional reservoirs” key exploration
and development targets.
Although gas is still stored in pores and fractures, as in “conventional” gas plays, in
the “unconventional” shale plays these pore spaces are minute and the fractures
are extremely fine. The organic matter also holds (adsorb) gas volumes that have
never been released into the pore or fracture spaces, which are released when
reservoir pressures are reduced during production assisted to the surface through
massive mechanical fracturing (fraccing) in the shales.
A major advantage of shale source rock reservoirs is that structural or stratigraphic
features to trap the migrating oil & gas are no longer required. This dramatically
expands the area over which gas can be found and produced. This moves the
paradigm away from finding where the traps are (location dependency). Gas shales
become a basin-wide resource play where the key is to optimise drilling and
production regimes to maximise returns.
Illustration of conventional and unconventional reservoirs
Source: company
15
 March 08

US unconventional gas
Investors outside the US may have a poor understanding of the rapidity of the rise
and current importance of shale gas in the US.

Unconventional gas is the big new In the United States there are currently over 35,000 producing gas shale wells
play onshore USA producing in aggregate around 600 bcf/year with an estimated current gas shale
resources in the United States of 500-600 tcf.

Applications of modern techniques of horizontal drilling and slick water fraccing

have transformed the economics of these reservoirs. These techniques are now
applied to a wide range of basins in the US and lease activity is particularly active in
plays such as the Caney/Woodford shales.

A number of large US listed companies have a particular focus on shale gas

exploitation – these include:

Devon Energy Inc (DVN US) – Market cap $44.5bn

Barnett & Woodford Shales
Developed the huge Barnett Shale natural gas field in the Fort Worth basin in Texas
in 2002 when it acquired Mitchell Energy. Has drilled more than 1300 wells since
2002, 539 in 2007. Currently producing 500mmcfd from this field now the USA's
largest producing gas field. Dominant lease position with 733,000 net acres.

Devon has a significant position in the Woodford Shale (70,000 net acres) in the
Arkoma basin the East Oklahoma with several hundred drilling locations. First
Woodford well drilled in 2005, 40 horizontal wells in 2006. 4 operating rigs in 2007
with a target of 55 wells.

Has recently sold almost its entire international portfolio to concentrate on the US
developments.

Chesapeake Energy Inc (CHK US) – market Cap $22.6bn

Barnett, Fayetteville & Woodford Shales

Owns the largest combined inventory of onshore leasehold (13.2 million net acres)
and 3-D seismic (19.2 million acres) in the U.S. Currently using 145 operated drilling
rigs to further develop its inventory of approximately 36,300 net drillsites. Has an
estimated 3.9 tcfe of proved undeveloped reserves and approximately 33 tcfe of
risked unproved reserves.

Newfield Exploration Inc. (NFX US) - market cap $7bn)

Woodford Shale

The majority of the planned drilling is associated with the development of the
Woodford Shale play of the Arkoma Basin of southeast Oklahoma. As of late
February 2008, production was 170 mmcfe/d gross. 10-12 drilling rigs active to drill
about 100 operated horizontal wells. More than half the wells will have lateral
completions in excess of 3,000 feet. Longer laterals help improve per unit finding
and development costs. Will also participate in the drilling of 50-60 wells operated
by others. Company has more than 165,000 net acres in the Woodford Shale play.

16
 March 08

Southwestern Energy Inc (SWN US) - market cap $10.6bn

Fayetteville Shale

Company has 19 rigs working on the Fayetteville Shale play in Arkansas, with net
acres of 906,700 and end 2007. Drilled 392 wells in 2006 and plans to drill 475 wells
in 2008, aiming to boost production to 450 mmcfd.

XTO Energy Inc (XTO US) – market cap $30bn

Barnett Shale, also developing in Fayetteville and Woodford Shales

Top producer from Barnett shale in East Texas. Entered market in Jan 2004. Holds
250,000 net acres. Current production 590 mmcfd (gross). 19 active drilling rigs.
Resources of 3.2 tcfe. Recently, XTO has engaged in CBM drilling in the Powder
River Basin, in the burgeoning plays of the Fayetteville Shale in Arkansas and the
Woodford Shale in southeast Oklahoma.

17
 March 08

Disclosures & Disclaimers

Analyst Details

Keith Morris Abbot Group Afren AMEC Bateman Litwin

Oil & Gas Analyst Dragon Oil Emerald Energy Expro Faroe Petroleum

First Calgary Petroleum Gulf Keystone Petroleum Hunting PLC Irvine Energy

JKX Oil Kentz Lamprell Melrose Resources

Nautical Petroleum Petroceltic Petrofac Soco

Sound Oil Sterling Energy Wellstream Wood Group

Key: ¡ = Analyst has financial interest z = Analyst has material interest „ = Analyst is a director † = Analyst has a business interest

Recommendation History Charts (For the last 12 months to previous days closing)

Irvine Energy

18
 March 08

% of recommendations % of recommendations % of recommendations

(all stocks) (corporate stocks) (non corporate stocks)
Sell Not rated
Not rated 4% 3%
Sell Not rated Reduce
7%
3% 23% 9%
Reduce
7%

Sell
0%
Reduce
2%

Add Buy Add Buy

Add
23% 60% 27% 57%
10% Buy
65%

Updated on a quarterly basis; last updated 6 December 2007

Evolution Securities – Recommendation Guide

Buy: Expected to outperform the FTSE All-Share Index by 10% or more in the next 12 months
Add: Expected to outperform the FTSE All-Share Index by up to 10% in the next 12 months
Reduce: Expected to underperform the FTSE All-Share Index by up to 10% in the next 12 months

Sell: Expected to underperform the FTSE All-Share Index by 10% or more in the next 12 months

Evolution Securities previous recommendation structure (to 21 July 2006) was similarly segmented into buy, add, reduce and sell recommendations. For
FTSE 100 stocks buy and sell recommendations were based on +10% and -10%, respectively, expectations of share price performance; FTSE Mid 250 stocks
buy and sell recommendations were based on +15% and -15%, respectively, expectations of share price performance; and for FTSE Small Cap, Fledgling
and AIM buy and sell recommendations were based on +25% and -25%, respectively, expectations of share price performance.

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the Financial Services Authority (FSA) for designated investment business and is a member of the London Stock Exchange.
This document is issued by Evolution Securities Ltd (ESL) (Incorporated in England No. 2316630), which is authorised and regulated in the United Kingdom by
the Financial Services Authority (FSA) for designated investment business and is a member of the London Stock Exchange.
This document is for information purposes only and should not be regarded as an offer or solicitation to buy the securities or other instruments mentioned in
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expressed or implied, is made nor responsibility of any kind is accepted by any Evolution Group company, its directors or employees either as to the accuracy
or completeness of any information stated in this document. There is no regular update series for research recommendations issued by ESL.
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The stated price of any securities mentioned herein is as at the end of the business day on 20 march 2008 unless otherwise stated and is not a representation
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19
 March 08

Price /

Irvine Energy 2p / 7p Buy

Business Info Capitalisation
Exploration and production onshore US Reuters/Bloomberg IVE / IVE LN Market Cap £15m

Issued Shares 705m Net Cash/(Debt) (E) -£1.5m

EVO Sector Oil & Gas 12 mth high/low 4p / 2p Pension Surplus/(Deficit) (E) £0m

EVO Sub Sector Oil & Gas Free Float 86%

Year end Dec 2006A 2007E 2008E 2009E 2010E Year end Dec, % 2006A 2007E 2008E 2009E 2010E

P&L (£m) Growth Drivers

Sales (excluding joint ventures) 0.0 0.0 4.1 16.5 21.0 Sales growth - - - 296.9 27.6

EBITA -0.4 -1.2 0.6 9.5 12.2 EBITA growth - - - n/m 29.3

Net Interest 0.1 0.1 -1.0 -1.7 0.3 EPS growth - - - - 21.1

EVO PBT -0.2 -1.1 -0.3 7.8 12.5 DPS growth - - - - -

Exceptionals and other adjustments 0.0 0.0 0.0 0.0 0.0 Effective tax rate - - - 0 25

Per share data (p) Returns (%)

EVO EPS -0.1 -0.2 0.0 1.1 1.3 Gross margin 0.0 0.0 46.1 66.0 65.6

Consensus EPS -0.1 - 0.5 1.2 - EBITDA margin - - 49.4 79.4 79.9

DPS EBITA margin - - 14.7 57.5 58.3

NAV 4.6 3.7 2.3 5.0 6.8 Asset turn 0.0 0.0 0.3 0.5 0.4

Cash flow (£m) Post-tax ROCE - - 4.0 30.1 19.4

EBITDA -0.4 -1.2 2.0 13.1 16.8 Valuation (x)

Change in working capital -0.1 0.0 0.0 0.0 0.0 P/E - - - 2.0 1.6

Interest, tax & pref dividends 0.1 0.0 0.0 0.0 0.3 EV / Sales - - 3.5 0.7 0.7

Free cashflow -0.3 -1.2 2.0 13.1 17.1 EV / EBITDA -4.2 -9.3 7.1 0.9 0.9

Capex and acquisitions net -3.8 -8.0 -15.0 -20.0 -20.0 EV/EBITA (x) -4.2 -9.3 24.0 1.2 1.2

Share issues / (buybacks) 6.9 5.0 0.0 0.0 0.0 FCF Yield (%) -7.8 -65.8 -85.5 -45.8 -19.2

Dividends (paid) Yield (%) - - - - -

Other items -0.1 0.0 15.0 10.0 0.0 Financial gearing (x)

Change in net cash 2.7 -4.2 2.0 3.1 -2.9 Net Debt/Equity (%) - 8.9 - - -

Closing net cash 2.7 -1.5 0.5 3.6 0.7 Net Debt/EBITDA - 1.3 - - -

Balance sheet (£m) EBITA interest cover - - 0.6 5.6 -

Net assets 9.3 16.8 15.9 35.0 47.9 Dividend cover 0.0 0.0 0.0 0.0 0.0

Capital employed 6.6 18.3 15.4 31.4 47.2

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