Research Report August 2013

5 August 2013

Sun Resources NL (SUR)

About to start getting the recipe right

Recommendation

Buy Price

$0.032 Target (12 months)

$0.095

Risk

Speculative

Analyst, Retail Services

Peter Arden 613 9235 1833 Authorisation

Damien Williamson 613 9235 1958

Expected Return

Capital growth 197%

Dividend yield 0%

Total expected return 197%

Company Data & Ratios

Enterprise value $64m

Market cap $68m

Issued capital 1,984.9m

Free float 81%

Avg. daily val. (52wk) $0.16m

12 month price range $0.024 - $0.083

GICS sector

Energy Disclosure: Bell Potter Securities acted as a broker to the $20m two-stage placement in August and September 2012 and received fees for that service.

Price Performance

BELL POTTER SECURITIES LIMITED ACN 25 006 390 7721 AFSL 243480

DISCLAIMER AND DISCLOSURES THIS REPORT MUST BE READ WITH THE DISCLAIMER AND DISCLOSURES ON PAGE 22 THAT FORM PART OF IT.

1mth 3mths 12mths

Price ($A) 0.031 0.035 0.062

Absolute (%) 3.2 -8.6 -48.4

Rel. Market (%) 7.2 1.2 -57.8

Tight hydrocarbon production gives USA a big helping hand

The USA has had an unprecedented turnaround in its energy supply mix over the past

decade with strongly growing production of unconventional hydrocarbons (most

recently tight shale oil and gas). This has enabled the world’s largest economy to

become a net energy exporter in 2012 for the first time since the end of World War II.

The growth in USA gas production has dramatically improved the country’s productive

competitiveness. More recently the rise in oil production from massive shale oil

deposits has started to dramatically reduce the country’s reliance on increasingly

expensive imported oil at a time when the USA economy is struggling to rebound from

very low growth rates and the burden of crippling government debt and deficits.

Use of experienced fraccing contractors is a positive step

The Woodbine tight oil play (Woodbine) in East Texas is now recognised as another

huge hydrocarbon field capable of sustaining a large oil output by horizontal drilling

and fraccing, which is why it is receiving attention from oil majors. Sun Resources NL

(Sun) was an early mover on oil in the Woodbine and has substantial interests over

strategic areas covering it and other stratigraphically adjacent hydrocarbon bearing

and productive horizons. As with other new unconventional hydrocarbon fields, it takes

time to establish the most suitable production techniques. While Sun has had setbacks

in its efforts to develop Woodbine oil production, we see encouraging signs that these

are now being addressed with more experienced fraccing capability recently engaged.

Sun well placed to start unlocking major Woodbine oil value

Increasing oil production by others from horizontal wells in the Woodbine shows it has

more favourable hydrocarbon characteristics than the highly prolific and better known

geologically adjacent Eagle Ford Shale. Recent Woodbine wells by others have had

initial production (IP) rates of circa 800 barrels of oil per day (bopd) and indicative

Estimated Ultimate Recovery (EUR) levels per well of up to 0.5 million barrels of oil

equivalent (Mboe). Sun is well placed to start unlocking potentially substantial value

from its strategic Woodbine areas by progressively establishing economically

significant oil production using the fraccing recipe that works for others. Our per share

equity diluted valuations are $0.13 for base case and $0.37 for upside case.

Accordingly we initiate coverage with a Buy recommendation with Speculative Risk.

Absolute Price Earnings Forecast

Year end June 2012a 2013e 2014e 2015e

Sales (A$m) 0.0 1.5 13.4 77.9

EBITDA (A$m) (4.5) (11.6) (8.3) 27.4

NPAT (reported) (A$m) (4.4) (11.5) (13.4) 2.8

NPAT (adjusted) (A$m) (4.4) (11.5) (13.4) 2.8

EPS (adjusted) (¢ps) (0.5) (0.6) (0.6) 0.1

EPS growth (%) na na na na

PER (x) (6.4) (5.0) (5.4) 32.7

FCF Yield (%) na na na na

EV/EBITDA (x) (14.6) (4.2) (11.9) 9.8

Dividend (¢ps) - - - -

Yield (%) 0% 0% 0% 0%

Franking (%) 0% 0% 0% 0%

ROE (%) na na na 8%

SOURCE: IRESS SOURCE: BELL POTTER SECURITIES ESTIMATES

2

4

6

8

10

Aug-12 Nov-12 Feb-13 May-13 Aug-13

Sun Resources Share Price

ASX 200 Energy Index (rebased)

Sun Resources NL (SUR) 5 August 2013

Contents

Background and Strategy ............................................................. 3

Projects ........................................................................................... 6 Funding ......................................................................................... 10 Valuation ....................................................................................... 12 Capital Structure .......................................................................... 15 Board of Directors and Management ......................................... 16

Recommendation ......................................................................... 17 Risks and Share Price Drivers .................................................... 18 Appendix A: Technical aspects of the Woodbine Sandstone .. 19


Background and Strategy

Rising Texas oil output set to make the USA the No 1 producer

The dramatic rise in oil production in Texas that has seen output more than double in the

past two and a half years (Figure 1) is set to propel the USA to the largest oil producer in

the world, overhauling Saudi Arabia by about 2020 according to forecasts from the Energy

Information Agency (EIA). The rise in Texas oil production, which is on track to reach 3

million barrels of oil per day (Mbopd) by the end of 2013, is largely driven by output from

the fraccing of the Eagle Ford Shale with significant and rising production from the fraccing

of the Woodbine.

This massive lift in Texas oil production has had major economic benefits for Texas and

the USA – it has spurred a huge lift in employment, not only in the oil and gas sector

(38,000 people were estimated to be employed on the Eagle Ford Shale alone in 2011) but

325,000 new positions were created in Texas overall in the year to May 2013. It has also

contributed strongly to state and federal taxes and begun to dramatically reduce the USA’s

reliance on increasingly expensive imported oil at a time when the USA economy is

struggling to rebound from very low growth rates and the burden of crippling government

debt and deficits.

Figure 1 - Chart of daily oil production in Texas, USA from January 1985 to April 2013

SOURCE: EIA; INVESTOR.COM

Sun has built an impressive land position on the Woodbine

Sun was listed on the ASX in August 1993 and since then it has been involved in oil and

gas exploration in many parts of the world. The company established modest gas and

condensate production in the USA about five years ago but it is only in the past two years

that the company has really refocused on building up a significant position in East Texas

totalling 20,020 net acres along the extension of the north-easterly trend of the very prolific

Eagle Ford Shale (Figure 2 over page). Sun’s areas are targeting the closely underlying

and almost geologically equivalent stratigraphic unit, the Woodbine, which is comprised of

sandstone, siltstones and shales and whose emerging significance as a highly productive

tight oil play is continuing to grow rapidly.

Sun was an early mover into the Woodbine, being the first ASX-listed company to

recognise its potential and make it a specific target. The company’s strategy now is to

totally focus on its Woodbine areas, where it has progressively built up an impressive land

position while reducing all its other interests to an absolute minimum by sales or farm-outs.

Sun’s non-Woodbine interests is a 45% interest in an offshore block in Thailand, which has

been 100% farmed out (Sun is not responsible for any ongoing commitments) for a

production royalty. The company completed the sale of its 9.25% interest in WA-47-R in

the offshore Carnarvon Basin of WA in late 2012 for an undisclosed sum.


Figure 2 - Map of the Eagle Ford Shale and Woodbine trends in East Texas, USA

SOURCE: SUN RESOURCES N L

The Woodbine was an old, marginal conventional oil play that is now a very important unconventional (tight) oil producer

The Woodbine Formation is of Late Cretaceous age and was named in 1905 and was first

exploited by conventional vertical wells in the 1930s. It is a 350 – 800 feet (107 – 243m)

thick sedimentary unit of interbedded sandstones, siltstones and shales. It had long been

recognised as hydrocarbon-bearing but until recently it has only been sporadically

productive from conventional vertical wells because the reservoirs are tight. The first

horizontal well (Stroman #1H) was drilled by PetroMax Operating Company (PetroMax)

affiliate, BWOC, in January 2005. The Kirten Field was the first to deploy horizontal drilling

and multi-stage fraccing in 2008 as operators moved East along the Eagle Ford Shale

trend. Since then, drilling, fraccing and completion techniques have evolved and improved

and over 100 horizontal wells have been drilled into the Woodbine across seven Counties.

Whereas conventional vertically completed wells into the Woodbine in the 1970s and

1980s used to be brought on with rates of 50 to 75 barrels of oil per day (bopd) and yielded

a total of 37k barrels of oil per well on average, the early horizontal wells that had been

fracture stimulated (fracced) came on at about four times the rate of the offsetting vertical

wells and started to produce over 35k barrels of oil per year. Since then, there has been

further refinement to the drilling and completion techniques. Horizontally fracced wells now

often achieve IPs of up to 800 to 1,000 barrels of oil equivalent per day (boepd) and have

Expected Ultimate Recovery (EUR) rates of 0.4 to 0.5 million barrels of oil equivalent

(Mboe) with slower decline rates than the Eagle Ford Shale.

Large partner, Amerril, has supported Sun’s Woodbine thrust

Sun’s partner in approximately 40% of its Woodbine leases is Amerril Energy LLC

(Amerril), which is also Sun’s largest shareholder (owning 292M shares currently equal to

14.7% of Sun’s issued shares). Amerril is a subsidiary of China Qingdao Kingking Group,

which is the second largest candle maker in the world. Amerril has an experienced

multinational oil and gas operating team based in Houston, Texas.

Amerril is a privately owned company that was formed in 2009 and is an approved operator

of oil and gas leases in the USA. Amerril now has over 100,000 acres of petroleum

tenements in Texas, Oklahoma and Louisiana of which over 40,000 acres is targeting the

Woodbine in Texas, where Amerril has recently begun to be the operator of some of its

areas and has begun to establish modest oil and gas production.


Amerril has already had early success in the Woodbine where it sold a 25% working

interest in the PMO Field to Halcon Resources Corporation (Halcon, NYSE – HK, not

rated), at a substantial profit in 2012, after production increases resulted from improved

fraccing and well designs

More recent joint venture agreement with Petro-Hunt adds acres and significant additional Woodbine production expertise

Sun recently reached agreement with Petro-Hunt LLC (Petro-Hunt) to jointly explore and

develop an Area of Mutual Interest (AMI) in the Lower Woodbine comprising 7,832 acres in

Leon County, Texas. Petro-Hunt is privately-owned independent oil and gas company

based in Dallas, Texas and is one of the largest privately owned companies in the world. It

is active in the onshore and offshore sectors of the global energy industry, including

offshore Western Australia.

Petro-Hunt is also the largest shareholder (with a 27.9% interest) in Halcon, which is one of

the largest and most successful operators in the Woodbine. Halcon drilled 22 wells into

the Woodbine in 2012 and expects to drill 60 to 65 Woodbine wells in 2013. Under the

Petro-Hunt arrangement, Sun and Petro-Hunt are each contributing oil and gas leases that

they own within the area of the AMI and under the operatorship of Petro-Hunt, they plan to

drill and explore the AMI with the first horizontal well planned for the last quarter of 2013.

Sun is contributing 810 net acres from its 100% owned Delta Oil Project and Petro-Hunt is

contributing 2,430 net acres that it owns and which also lie within the AMI. Petro-Hunt will

hold a 75% interest and Sun will hold a 25% interest in the AMI.

Woodbine growth in production could replicate what happened with the Eagle Ford Shale as it was de-risked and opened up

There has been almost exponential growth in hydrocarbon production from Eagle Ford

Shale over the past five years and while it has a significant gas content, oil has made up a

growing proportion of the hydrocarbon output (Table 1). Recent estimates put the total

daily Eagle Ford Shale production at about 1Mboe, which is estimated to be more than the

daily production from the highly prolific Bakken Field in North Dakota.

Table 1 - Recent leasing and hydrocarbon production history for Eagle Ford Shale

SOURCE: TEXAS RAILROAD COMMISSION; HART’S NGI’S SHALE DAILY; AURORA OIL & GAS LTD

While it is widely recognised that the upper sections of the Woodbine are not a

homogeneous formation, it is becoming very apparent from the impressive results of the

various companies now producing from it – such as Halcon, EOG, Crimson Energy

Partners III LLC, PetroMax, Encana, Gastar, Chesapeake and Amerril – that the Lower

Woodbine contains a very significant amount of oil with generally minor amounts of gas

and that very substantial oil production can be established there by using horizontally

drilled wells and appropriate fraccing.

The production from the Woodbine has clearly established that it has significantly better

porosity and permeability than the Eagle Ford Shale and wells producing from the Lower

Woodbine also show significantly slower decline rates than for the Eagle Ford Shale.

These enhanced Woodbine well characteristics have led to significant and strongly growing

oil production being rapidly developed. Other operators are now reporting that wells in the

Lower Woodbine in East Texas have EURs of 0.3 to over 0.5 Mboe based on traditional

well spacings of about 160 – 320 acres. Several groups producing from the Lower

Woodbine are reporting good success from closer well spacings still yielding similar EURs.

Year

Drilling

Permits

Issued

Producing Oil

Leases

Producing

Gas Wells

Crude Oil

Production

(kbpd)

Proportion of Total

Hydrocarbon

Production

Natural Gas

Production

(Mcfpd)

Proportion of Total

Hydrocarbon

Production

Condensate

Production

(kbpd)

Proportion of Total

Hydrocarbon

Production

Total Oil & Gas

Production

(kboepd)

2008 26 N/A N/A 0.4 21% 8 79% 0 0% 2

2009 94 40 67 0.8 8% 47 78% 1 14% 10

2010 1,010 72 158 12 16% 298 65% 14 19% 74

2011 1,826 368 550 128 36% 967 45% 72 20% 361

2012 4,343 1,262 875 352 61% 950 27% 72 12% 582


Projects

Sun’s main focus is the Lower Woodbine in East Texas

The hydrocarbon-bearing Woodbine occurs in the East Texas Basin, being on the eastern

edge of, and on the same North-Easterly trend as, the Eagle Ford Shale (Figure 2). The

Woodbine stretches over an area of over 60 square miles (155 km2) with current activity

taking place in the Counties of Brazos, Grimes, Leon, Madison, Robertson, Houston and

Walker.

The Woodbine sands have long been a target of conventional oil producers. In the region

of Madison and surrounding Counties of Brazos, Grimes, Leon, Robertson, Houston and

Walker in East Texas there is a mini-basin, the Brazos Basin, which dips below the

southern edge of the Angelina-Caldwell Flexure, bordered by the Edwards-Sligo Rim to the

south, the San Marcos Arch to the west and the Sabine Uplift going east. The underlying

Buda Formation defines the bowl-like shape. This area has been the focus of most of the

horizontal well activity in the Woodbine. The upper, generally sandy part of the Woodbine

was the focus of early attention with horizontal wells but more recently the more extensive

and predictable Lower Woodbine, which is generally shalier, has attracted growing

attention of operators (Figure 3).

Figure 3 - Map showing the Woodbine acreage by operator

SOURCE: OIL & GAS INVESTOR

Sun has a significant net acreage position in the Woodbine

The company holds a total net interest in 20,020 acres covering the major hydrocarbon-

rich Woodbine trend, principally in the Leon County area of East Texas. This is a

substantial land holding, which is made up of five project areas. With the exception of the

largest net holding (in the Delta Oil Project), the areas are held in joint venture

arrangements with other exploration and production groups (Table 2 and Figure 4).


Table 2 - Sun's tenement holdings over the Woodbine in East Texas

SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES NOTES: 1. FORMERLY RICHLANDS OIL PROJECT

2. HAS 16.7% INTEREST IN THE C W BROWN #1H WELL

3. AMI COVERS 7,832 ACRES

Sun produces very modest amounts of oil from its 13.54% to 16.67% interest in the Beeler

Oil Project (previously known as the Richland Oil Project) (Table 2 and Figure 4) as the

operator continues with clean-up and flow back operations at the three horizontal

Woodbine wells. The most productive well, the Ellis #1H, produced an average 90-day IP

rate of only 150 bopd, well below most other recent Lower Woodbine wells.

Figure 4 - Map of Sun's Woodbine areas in East Texas, USA

SOURCE: SUN RESOURCES N L

The Beeler Oil Project is located immediately adjacent to the Gresham A #1H well, one of

the best performing horizontal Lower Woodbine oil wells in Leon County, Texas. The

Gresham A #1H well was drilled by a group that was acquired by Halcon which produced

over 105,000 barrels of oil in its first 166 days of production, having averaged 793 bopd

over its first 30 days of production and was producing at about 600 bopd in late 2012.

Originally Sun and the other two farminees were to have earned larger interests in the

Richland Project by funding more of the costs of the first well, Beeler #1H, but the Farmors

exercised their option to participate in the well, thereby reducing the interest that Sun and

its farminee partners acquired. Steadfast Resources LLC, a company associated with the

farminors, subsequently earned a 40.625% working interest in the Richlands Oil Project by

funding its share of the cost of the C W Brown (previously called Beeler) #1H well.

Oil Project Name

Sun

Working

Interest

Other PartnersGross Leased

Area (acres)

Sun Net or

Equity Leased

Area (acres)

Wells

Drilled

Wells

FraccedProduction Status Comments

Beeler1

13.54%2

Richland Resources (13.5%);

Amerril Energy LLC (13.5%);

Steadfast Resources (40.6%);

Farmors (18.8%)

1,360 227 4 3 M inor production

from 3 wells

Principally target ing

Upper Woodbine,

also stacked targets

Delta 100% 11,010 11,010

Recently transferred

810 acres to Halcon

AM I

Amerril 50% Amerril Energy LLC (50%) 12,293 6,147 3 2

M inor production

from Seale # 1H well;

T Keeling # 1H well

being fracced now

Principally target ing

Lower Woodbine,

also stacked targets

Normangee 50% Amerril Energy LLC (50%) 3,652 1,826

Original Woodbine

discovery f ield

nearby

Petro-Hunt AM I 25% Petro-Hunt (75%) 3,4203 810

Petro-Hunt is

Halcon's major

shareholder. Halcon

has very impressive

Woodbine record

Totals 28,315 20,020 7 5


Four wells have been drilled in the Beeler Oil Project but so far only a very modest rate of

oil production has been achieved. Three wells have been drilled, fracced and completed

as horizontals to access oil in the Upper Woodbine – the Ellis #1H, the John Beeler #1H

and the C W Brown (previously called the Beeler) #1H. These wells were achieving

average flow rates of 172, 75, and 50 bopd respectively as flow back from the fraccing

declined, but this has now reduced to average flow rates recently of 140, 31 and 24 bopd

respectively. These rates are well below the rates achieved for many contemporary Lower

Woodbine wells, which have achieved initial production (IP) rates of 800 – 1,000 bopd with

relatively slow decline rates so that they have regularly yielded 40k to 50k barrels of oil in

the first 90 days of production. The total Beeler Oil Project produced only 14k barrels of oil

in the June 2013 quarter (91 days).

Carefully controlled staged fraccing of T Keeling well starts

The operator and owner (Amerril) of a 50% working interest of the Amerril Oil Project, in

which Sun also holds a 50% working interest (Figure 2 and Table 3), has completed about

four weeks of flow back operations at the Seale #1H well following the successful 23-stage

frac operation. Unfortunately the flow back operations only incorporated seven stages of

the multi-stage frac near the heel of the well after a mishap in which the shaft of the drill bit

used to drill out the frac plugs sheared off and the bit remained in the hole.

Even so, the maximum flow rates achieved from the severely blocked well were

understood to have briefly reached 91 bopd. Attempts to retrieve the drill bit have so far

been unsuccessful and have been suspended while the T Keeling #1H well is fracced. It is

not clear if more attempts will be made to retrieve the broken off drill bit so the other 16 frac

plugs in Seale #1H well can be drilled out and the entire length of the fracced lateral can be

flowed back.

Flow rates from the Seale #1H well recently increased initially after installation of a jet

pump but they have subsequently decreased, apparently in response to the continuing

presence of the broken drill bit.

Very recently, the operator began the staged fraccing of the suspended T Keeling #1H

well. This well was targeting the lower part of the Middle Woodbine. It was drilled in

January 2013 but was then cased and suspended awaiting the fraccing and clean-up of the

Seale #1H well, which took a lot longer to occur because of the well mishap. The fraccing

operation on the T Keeling #1H well is being very carefully controlled and has consisted of

an initial first five stages across about 1,500 feet at the “toe” of the lateral section of the

well. Each of these first five stages of the T Keeling horizontal well had between three and

five clusters of perforations per frac stage and a frac fluid and proppant pumping program

that is similar to those used successfully in Lower Woodbine wells of others nearby and is

currently considered to represent best practice. Sun has reported that all five stages were

fracced successfully as designed and that a period of flow back to recover fraccing fluids is

now underway.

As described earlier (see page 4), Sun has reached an agreement with Petro-Hunt to form

a Joint venture for an AMI over about 7,832 acres that includes an area of 810 net acres

Sun will contribute from its Delta Oil Project and Petro-Hunt will contribute 2,430 net acres

from its nearby areas within the AMI (Table 2 and Figure 4). Petro-Hunt will be the

operator of the Joint Venture and the partners are intending to drill the first horizontal well

into the Lower Woodbine in the last quarter of 2013.

The operator and owner of a 50% working interest (Amerril) of the Normangee Oil Project

(Table 2 and Figure 4), in which Sun also holds a 50% working interest, is continuing with

planning for the first Woodbine horizontal well in this project area. The Normangee project

is located to the south west of the Amerril Oil Project, and so is closer to existing

successful Lower Woodbine wells.


Other potentially attractive oil target horizons besides those in the Woodbine

There are at least four other potentially significant and attractive oil-bearing hydrocarbon

target horizons stratigraphically (and physically) near to the Woodbine that other groups in

the district are starting to investigate and even produce from. These other horizons include

the following, which could be accessed by horizontal and/or potentially vertical wells that

are fracced vertically to give comingled production as is already occurring in a limited way:

Austin Chalk – located just above the Eagle Ford Group; already supports production

Sub-Clarkesville – located immediately below the Eagle Ford Group and immediately

above the Woodbine; already supports production in places in the district

Georgetown Limestone – located below the Woodbine; already supports production in

the area but may not yield high returns from fraccing because of more brittle nature of

the rocks

Bossier Sands – located well below the Woodbine; already supports production in the

district (by Navidad Resources LLC, which now has over 50 vertically fracced

commingled wells producing almost 6,000 boepd)

While Sun is currently totally focused on the Woodbine (and the Lower Woodbine in

particular), the company recognises that there are other oil-rich hydrocarbon horizons

elsewhere in the stratigraphic column in their lease areas. We believe that Sun is likely to

progress to exploring and potentially producing from some of these other areas in the next

few years after these other plays are better developed and the company is able to afford to

explore and develop them using cash flow from Woodbine production.

Non-Woodbine USA Petroleum Interests

Sun has 20% to 37.5% working interests in the Margarita and Redback Projects, onshore

South Texas, which includes the modest gas and oil production from the Flour Bluff Gas

Field near Houston . The company has a 37.5% interest in a 400 acre lease covering the

TBF 1.46 oil exploration project that has the potential to contain 0.5M barrels of

prospective oil resources in the Lower Frio Formation. The exploration well for this

prospect is the subject of farm-out arrangements that the company is continuing to

progress as it is Sun’s intention to divest its interests in all these other projects.

Other Petroleum Interests

Sun announced that 100% of the L20/50 Concession in offshore Thailand had been farmed

out to Siam Moeco Limited (SML) in October 2012 and that as a result neither Sun, which

held a 45% interest or its partner holding the balance, Carnarvon Petroleum Ltd ( ASX –

CVN, not rated), had any further exploration or development commitments in relation to the

Concession. Terms of the farm out were that SML would pay CVN and Sun $US8.5M

upon the commencement of commercial production and would also pay CVN and Sun a

2% royalty capped at $US10M (Sun’s share of each being 45%).

The company has sold its 9.25% interest in the WA-47-R block in the offshore Carnarvon

Basin to Hydra Energy (WA) Pty Ltd subject to regulatory approvals. Sun has a 20%

interest in ESA Area 4 Block and ESA Area 5 in offshore Malta. The standing of these

permits has become uncertain because of a decision by the government of Malta. The

operator of these permits is considering its options in relation to an arbitration hearing

and/or further negotiations with the government of Malta.

The company has previously executed a non-binding term sheet with an undisclosed party

whereby Sun was to participate in the drilling of a high impact well designed to test a 720

billion cubic feet (Bcf) conventional gas target in onshore North-West Europe. The

Operator of the venture has been in negotiations with local government authorities on the

approvals process for the well since the end of December, 2012.


Funding

Unsatisfactory recent results have used up cash reserves

Sun is estimated to have spent about $40M over the past two years on the acquisition and

exploration of its Woodbine projects. This has been funded out of net capital raisings

totalling $29M and the issuance of about $15M in securities over that time.

The company still had cash of $3.6M at 30 June 2013 after having had additional

exploration expenses in the June 2013 quarter related to completion and testing of several

wells and the remedial work arising from several well difficulties. More recently the

company has been involved with funding its share of the fraccing of its suspended T

Keeling #1H well, which we estimate should be a relatively modest additional amount of

the total well cost, and for which its share of expenditure is 50%.

Having only established minimal oil production from its efforts to date, the unsatisfactory

drilling results have meant that the company has failed to generate any significant oil sales

revenue to supplement its depleted cash reserves.

Future funding needs depend on whether the company elects to continue to contribute its share of costs or to farm them out

The future funding needs of Sun depend on whether the company chooses to maintain its

current various working interests in its five projects or decides to farm out them out. With

working interests of 100% of the large Delta oil Project and 50% of the large Amerril oil

Project, the company is facing significant exploration costs until a significant rate of oil

production is established. Once the company has been able to establish a significant and

growing oil production rate, it should be much easier for it to obtain debt funding at a

reasonable cost. We estimate that equity oil production at a rate of about 2,000 boepd with

a good prospect of increasing that equity oil production to a rate of about 5,000 boepd

within a year would be sufficient to underpin significant ($50M to $100M) debt funding on

reasonable terms (interest rates of circa 7.5% pa).

We estimate Sun should drill at least 8 equity wells in FY14

With total well costs conservatively estimated at around $US6M to $US8M (including

completion and fraccing), we estimate Sun requires about $50M to $65M to fund a

reasonable rate of drilling and oil production development (of at least three to five wells in

each of its major projects so that it has about 8 equity wells) in FY14 if it wants to maintain

its current working interests across all its projects covering the Woodbine. If the company

decides to farm out some of its interests in its larger projects, its funding requirements

would be commensurately lower.

Delaying exploration and development reduces the need for funding but potentially jeopardises retention of the areas and defers the potentially significant returns from success

If Sun were to decide to largely retain its current working interests but to have a slower rate

of exploration drilling and development wells in FY14 than we forecast, it would also

reduce the amount of funding it needs but it could jeopardise its retention of its working

interests. There is generally a three year leasing period (that may come with an option of

a two-year extension) for the areas to be worked by drilling. While delaying or deferring

exploration and development drilling may not mean the company is at risk of the imminent

loss of title to its areas, it does mean that it is defers the potentially significant returns from

establishing the sort of successful oil and related hydrocarbon production that Sun’s

adjoining explorers have begun to routinely establish.


Healthy margins of around $US70 per boe are being achieved from the Lower Woodbine in

wells operated by others adjacent to Sun’s areas, so there is a strong incentive for the

company to access the necessary funding to accelerate activity.

Farming out drilling costs severely reduces a company’s value

One way for Sun to significantly reduce its future funding requirements is to farm out its

interests in its larger areas. With many smaller resource companies finding it very difficult

to raise additional equity capital, let alone access debt markets in any meaningful way,

those resource companies with significant equity in good projects are increasingly opting to

farm out some of that equity to meet their funding needs.

We note that this practice of farming out has included ASX-listed oil and gas companies

such as Austin Exploration Limited (ASX – AKK, not rated) which has interests in East

Texas near to Sun. AKK recently reached a farm-out arrangement with an unnamed major

US oil and gas company whereby it is farming out a 70% interest in its Birch Prospect,

where it is targeting the Eagle Ford Shale. The terms of this farm-out are for the farminee

is to drill three horizontal wells (each at an estimated cost of about $US 8M each) plus pay

AKK $1.95M for past drilling and as an option over the block where the drilling is to take

place. The farm-out covers an area of about 4,295 acres.

Our analysis of the potential impact of this sort of arrangement shows that it potentially

causes a severe reduction in the value of the retained interest in the event that the area

concerned subsequently has significant hydrocarbon reserves and production. We

estimate the unrisked NPV of Sun’s 100% owned Delta Oil Project, which currently covers

an area of 11,010 acres, at over $500M. If the company were to farm out a 50% interest in

return for the drilling of three or four wells within a similar sized area, we estimate the value

of Sun’s interest in the Project could decrease by about 30%.

Farm-outs less likely unless T Keeling fraccing disappoints

On the basis that Sun’s Woodbine areas are still regarded as potentially very prospective

for substantial oil reserves and production, we are not assuming they are going to farm out

any areas in the near term. We believe that Sun would prefer to raise additional capital to

fund development of its Woodbine areas after it has successfully fracced and flow tested a

well, preferably the T Keeling #1H well, and has therefore established that the new fraccing

recipe is the appropriate one. In the event that the T Keeling #1H well is not successfully

fracced as expected, we believe it will be more difficult for the company to raise equity

capital and it may be forced to accept one or more farm-outs to fund further exploration

and development until such time as its can achieve alternative funding.

Capital raising more likely after successful T Keeling fraccing

On the assumption that the fraccing of the T Keeling #1H well is successful, we believe

Sun will then seek to raise additional capital during FY14 to enable it to fund its share of

the development of additional wells using the successful fraccing and completion recipe.

We have assumed that the company will raise up to a net $20M of additional equity capital

in FY14. For the purposes of our forecasts and valuations, we have conservatively

assumed this would be done on the following basis:

Shares to be issued: approximately 684M

Issue price: $0.031 (around the current price)

Net amount to be raised: $20M

We have assumed this potential capital raising would be done at around the current market

price because we believe that price is already at a significant discount to fair valuation

because of the poor outcomes from recent fraccing. A successful outcome from the current

fraccing of the T Keeling #1H well should lead to a higher rating and share price.


Valuation

Sun’s value is well above the share price on two key metrics

Several methodologies can be used to derive valuations for areas which contain economic

deposits of hydrocarbons in major geological formations such as the Woodbine. Whilst we

still regard net present value (NPV) based estimates derived from areas with significant oil

and associated hydrocarbon production that is underpinned by certified proven reserves as

the most reliable, there are two more subjective valuation methods of NPV-based forecasts

and of land area values derived from recent commercial transactions.

Since Sun’s Woodbine interests are yet to achieve significant hydrocarbon production or

have proven reserves on any of its leases, we have adopted a valuation methodology

based on consideration of the two more subjective methods of NPV-based forecasts and of

land area values derived from recent commercial transactions.

Our estimates of the value of the company’s Woodbine areas by each method gives a

value for Sun’s shares that is well above the current share price.

NPV-related forecasts give the best guide to valuation

We regard valuation estimates based on NPV-related forecasts are the best guide to the

valuation of Sun. We have used the following assumptions for our forecasts of potential

hydrocarbon production from the company’s Woodbine areas (Table 3).

Table 3 - Assumptions for forecasts of production from Sun's Woodbine areas

Variable Assumptions

Well costs $US 8M

Well spacing 80 acres

EUR 350,000 boe

IP 500 boepd

Time to drill and complete a well 24 days

Time from spudding well to production 55 days

Average hydrocarbon makeup Oil 70%; condensate 5%; NGL 5%; gas 20%

SOURCE: BELL POTTER SECURITIES ESTIMATES

Applying the forecasts in Table 3 we have derived a valuation for Sun’s Woodbine assets.

We have applied a heavily risk adjusted factor (of 70%) to the valuation of the company’s

Woodbine assets to determine an overall base case valuation for the whole company

(Table 4). The base case valuation only considers the Woodbine – it does not consider any

of the other nearby oil-bearing stratigraphic horizons. The upside case valuation considers

a much lower risk adjustment factor (of 25%) for the NPV-related valuation of the

Woodbine assets and also contains a modest valuation component for other horizons.

Both valuations are equity diluted and assume additional capital as per page 10.

Table 4 – Equity diluted NPV-based valuations of Sun

SOURCE: BELL POTTER SECURITIES ESTIMATES NOTES: 1. ON EQUITY DILUTED BASIS ASSMING EFFECTS OF SHARE ISSUE IN FY14; MAY NOT ADD BECAUSE OF DILUTION EFFECTS.

Exploration - USA Projects - Woodbine 369 0.13 1,103 0.38

- Other 1 0.00 3 0.00

- Thailand 3 0.00 8 0.00

- WA 1 0.00 4 0.00

- Malta 1 0.00 1 0.00

- Total 374 0.13 1,118 0.38

Net Corporate and Financials2 (27) (0.01) (27) (0.01)

Total 347 0.13 1,090 0.37

Base Case Upside Case

$ M $ per share 1 $ M $ per share 1

Sun Resources NL (SUR) 5 August 2013 2. INCLUDES CORPORATE COSTS AND ADDITIONAL EQUITY.

Valuation based on recent transactions for Woodbine acreage

It is difficult to obtain detailed information on all recent oil and gas exploration asset

transactions but there have been several recent transactions in which there is enough

information to make a reasonably reliable estimate of the unit value being ascribed to land

over the Eagle Ford and Woodbine trend which is near to the areas held by Sun (Figure 3).

Much of the range of unit values per acre for recent transactions in or around the

Woodbine can be accounted for by whether the acreage contains established production

and reserves or not (Table 5).

Table 5 - Recent transactions of comparable Eagle Ford and Woodbine acreage

SOURCE: COMPANY DATA; BELL POTTER SECURITIES ESTIMATES

We believe that a value per acre of $US 15,000 is the appropriate value for Sun’s

Woodbine acreage. We have decided on that amount on the basis that while Sun has a

substantial net acreage position that is believed to be in a prospective part of the

Woodbine as Sun’s areas are located adjacent to areas that have achieved strong IPs and

large EURs, they do not yet have any significant production and do not have any reserves.

Despite its lack of significant production from its areas so far, several of the wells drilled by

Sun have recorded strong oil shows during drilling and we believe that with more suitable

fraccing and completion results, which is expected to for the T Keeling #1H well currently

being fracced, Sun should be able to achieve and sustain at least the sort of flow rates

generally seen in other parts of the Woodbine.

Applying our value of $US 15,000 per acre to Sun’s Woodbine assets gives a value

of $327M or $0.119 per share on an equity diluted basis (arising from the assumption

of additional equity as per the assumptions on page 10) and an alternative total

valuation for Sun of $290M or $0.105 per share on an equity diluted basis.

Comparison with AUT shows what is possible

Aurora Oil & Gas Limited (ASX – AUT, not rated) has grown rapidly from a market

capitalisation of $56M in December 2009 to $1,478M currently through the development of

significant oil and gas production (Table 6 over page) from a slightly smaller net acreage

position in an area to the west of Sun’s area but covering the Eagle Ford Shale. We see

strong similarities in the development of AUT and Sun in that AUT was an early mover in to

the Eagle Ford Shale region as Sun is an early mover into the Woodbine. AUT initially

brought in a larger partner to provide the technical capability and help it fund the

development of its areas and then more recently it took on significant debt and also did a

deal with one of the oil majors to accelerate the development of the rapidly growing

business. Sun has similarly done a similar thing in that it has brought in a bigger partner

(Amerril) and more recently done a deal with one of the largest independent oil and gas

exploration companies (Petro-Hunt) involving formation of an area of mutual interest that

will be managed by the large partner.

BuyerTransaction

Date

Net Area

(acres)Seller Acquisition Terms

Value

($US M)

$US/equity

acre$US/boe

Woodbine Acquisitions May 2011 na Petromax Operating Co.

Included w ells w ith IPs of ~900bopd and EURs of over 0.5Mpoe and

reserves of 19.8 Mboe 250 na 13

Halcon Resources Aug 2012 20,268 Petromax and other groups $US301.6M cash and 20.8M shares; producing ~2,000 bopd 489 24,117 na

EOG Resources March 2013 50,000 ZaZa Energy Corp. 3-stages - up to $US 50M cash & commitments to drill up to 9 w ells 123 2,465 na

Energy & Explor Partners April 2013 57,275 Chesapeake Energy Corp. Mostly gas production; includes 11 producing w ells 500 8,730 na

Not disclosed May 2013 3,007 Austin Exploration (ASX - AKK) Selling 70% interest in return for drilling 3 w ells plus $1.95M cash 26 8,631 na

Meidu Holdings July 2013 15,100 Woodbine Acquisition LLC Includes production of about 5,000 boepd and 28.3Mboe reserves 535 35,430 19


While it is now recognised that AUT is in a favourable part of the Eagle Ford Shale, we

note that the Woodbine is generally recognised as having superior hydrocarbon production

characteristics, is generally far more “oily” and generally gives rise to cheaper production

and completion with superior (slower) decline curves. These attributes also afford better

downside protection from any lower oil prices and also significantly, the Capex required to

drain oil per acre is likely to turn out to be almost half of what would be needed for the

Eagle Ford Shale.

We understand that even the best Eagle Ford Shale wells generally have significantly

lower net back values than wells in the Woodbine, because most Woodbine wells have a

much higher oil and liquids content.

Table 6 - Production and financials for AUT from 2009 to 2012

SOURCE: AURORA OIL & GAS LTD; BELL POTTER SECURITIES ESTIMATES

Year Ending December 2009 2010 2011 2012

Production

No of wells - Producing 6 66 216

- Stimulation underway 2 1 4 8

- Awaiting stimulation 2 8 12

- Drilling or rigging up 2 6 7

- Total 2 11 84 243

Gross 3P Reserves (Mboe) 43 112 139 165

EV/boe ($US) 1 7 10 12

Equity acres over Eagle Ford Shale 20,285 15,600 16,365 19,100

EV/Acre ($US) 2,481 51,814 83,120 104,035

Gross Equity Production - Mboe 0.2 1.0 3.9

- boepd 422 2,858 10,678

Financials

EBITDAX ($US M) (2.2) (0.6) 39.8 167.5

NPAT ($US M) (11.3) (6.6) 30.6 58.8

Operating Cash Flow ($US M) (2.2) (2.2) 39.8 139.9

Net Cash - $US M 5 46 40 (327)

- $A M 5 45 39 (355)

EV ($A M) 50 808 1,360 1,987

Share Price ($A) 0.27 2.24 3.39 3.63

Market Capitalisation ($A M) 56 853 1,399 1,632


Capital Structure

Capital expanded by issue of securities for Woodbine areas

Sun’s move into the East Texas area where it is targeting the Woodbine has seen the

company issue a significant amount of securities (shares and options) related to payment

for various land leasing arrangements. This has involved the issue of 350.8M ordinary

shares, 395M performance options to shares and 50M unlisted options. The acquisition of

the company’s 50% interest in the Amerril Oil Project involved the largest single share

issue component when Sun issued 292M shares at $0.05 (equivalent to $14.6M) to

complete the transaction after having paid $US 0.8M cash for the initial 2.5% interest.

Amerril is the company’s largest shareholder with a 14.7% interest, which it acquired when

it sold 50% of its Amerril Oil Project to Sun in September 2012.

Sun has also issued 1,036.7M shares to raise a total of $30.8M in two major capital

raisings over the past two years - a two stage share placement and a rights issue that

raised $10.8M at a share price of $0.017 in September/October 2011 and a two stage

placement that raised $20M at a share price of $0.05 in August and September 2012.

A total of 140M shares were issued after the exercise of 140M Class D and Class G

performance options upon appropriate milestones having been achieved. A total of 115M

performance options have lapsed and 140M performance options are still current.

The current issued capital of the company is given in Table 7.

Table 7 - Issued capital of Sun

SOURCE: COMPANY DATA; IRESS

1,984.9

Expiring 6/01/14; exerciseable at 12¢: 1.3

Expiring 31/03/14; exerciseable at 2.5¢: 97.3







Total Unlisted Options 173.3

Unlisted Performance Options (M)

Class E expiring 30/04/17; exerciseable at 0.1¢: 65.0

Class F expiring 30/04/17; exerciseable at 0.1¢: 75.0

Total Unlisted Performance Options 140.0

Total Issued Securities (M) 2,298.2

Fully paid ordinary shares (M):

Unlisted Options (M):


Board of Directors and Management

Sun’s Executive Directors have direct oil and gas experience

The Non-Executive Chairman is Dr Wolf Martinick. He joined the board in February 1996

and was appointed Chairman in March 2011. He is an environmental scientist with

extensive resources industry experience spanning over 30 years. He is Executive

Chairman and Managing Director of Oro Verde Ltd (ASX – OVL, not rated) Non-Executive

Chairman of Weatherley International Plc. (AIM – WTI, not rated), Azure Minerals Ltd (ASX

– AZS, not rated) and chairman of MBS Environmental Pty Ltd.

Dr Govert Van Ek is the Managing Director. He was appointed to this position in March

2013. He has 17 years of experience in oil and gas exploration and development and

related finance and investment areas in Europe, Asia and Australia. He was previously

Chief Executive Officer at Spyker Energy and Business Development Executive at Genting

Oil and before that he worked for ANZ Investment Bank and was Head of Oil and Gas

Lending for BNP Paribas. Prior to that he was an operations engineer and was involved

with oil and gas field development with Shell.

Matthew Battrick is an Executive Director, Technical. He was appointed to the board in

January 2008 as Managing Director and was appointed to his current position in March

2013. He is a geologist and has had extensive oil and gas experience with LASMO,

Ampolex, ExxonMobil, and Eni. He was Exploration Manager and General Manager for

Pancontinental Oil and Gas NL (ASX – PCL, not rated) prior to joining Sun.

Damian Kestrel is a Non-Executive Director. He was appointed to the board in February

2012. He has over 15 years of research, sales and management experience in Asian

equity capital markets, most recently with CLSA, to whom he remains a consultant.

John Kenny is a Non-Executive Director. He was appointed to the board in March 2012.

He is a lawyer who practices in the areas of corporate and mining law and investment

banking. He is a Non-Executive Director of Gippsland Ltd (ASX – GIP, not rated).

Craig Basson is Company Secretary and Chief Financial Officer. He was appointed to

these positions in November 2009. He has over 20 years of experience in accounting,

auditing and financial management of resources and other companies.


Recommendation Lack of production success weighs on share price even though neighbouring groups do major re-rating transactions

Although Sun has not yet achieved any significant oil production success in the two years it

has been targeting the Woodbine, we believe its Woodbine areas in East Texas are still

very prospective for substantial amounts of oil and that by using more appropriate fraccing

and completion techniques, it really should be able to establish significant sustainable and

highly profitable production. The prospectivity of its Woodbine areas is not reflected in the

market rating of the company’s shares. We assess the base case valuation for Sun’s

interests in East Texas is significantly higher than the current enterprise value (EV) of the

whole company. We have seen that despite considerably firmer oil prices, expanding and

highly profitable production from neighbouring company leases and further transactions

involving nearby areas that have established sale metrics that impute a much higher rating

for Sun’s shares, the market remains concerned about the ability of the company

successfully monetise its Woodbine interests.

Current frac may indicate what Sun’s areas are capable of

Recently Sun and its partner began to frac their previously suspended T Keeling #1H

horizontal well using the specialist fraccing contractor which has been successfully fraccing

horizontal wells for the leading producers from the Lower Woodbine. The T Keeling #1H

well is being fracced in carefully controlled segmented stages, with an initial five stage frac

over 1,500 feet at the toe of the approximately 7,000 feet long lateral. Flow back has

commenced from that initial stage and it will be followed by a subsequent 18 stage fraccing

of the remaining 5,500 feet of that lateral, which should be done in coming weeks. It should

result in substantially better production rates than Sun has achieved in its other wells and

which are more in keeping with the results achieved by the many wells of others nearby.

There are other nearby oily horizons besides the Woodbine

While the Woodbine is not a homogeneous zone of oil-bearing strata, and it is usual for

early operations of unconventional oil production to encounter difficulties and setbacks, we

believe Sun has had more than its fair share of them but should now be able to put them

behind them. The company still has a large net acreage position, most of which has not

been subjected to any form of drilling or tight oil production techniques for the Woodbine or

any of the other adjacent oil-bearing horizons. While Sun’s attention (as for most of the

other Woodbine operators) is solely focussed on the Woodbine (and more specifically for

Sun on the Lower Woodbine), there are potentially another four to six adjacent

stratigraphic horizons that could be equally hydrocarbon-rich and very oil productive with

the appropriate fracture stimulation from horizontal wells.

Sun is still well placed to begin to unlock significant value

Despite its technical setbacks so far, the company still has a significant and largely

untouched exploration tenement position in what is still regarded as very prospective areas

of oil-rich East Texas. This sees Sun still well placed to begin to unlock the value in its

areas either by continuing to fund its share of exploration and development using the most

appropriate fraccing and completion techniques or by farming out some of its areas so the

financial and technical strength of others is brought in for the good of Sun shareholders.

We recommend Sun as a Buy with a speculative rating. In setting the price target,

we have applied a 25% discount to our risk weighted base case valuation to take

into account the fact that the company has had a series of setbacks and has not yet

achieved successful production from its horizontal wells. Our price target is $0.095.


Risks and Share Price Drivers

Besides the usual oil and gas industry risks, establishing a successful fraccing regime is a critical risk

We regard the following as the major risks to Sun achieving success:

Establishing a successful fraccing regime that enables the company to realise the full

potential of its extensive net land position in the Woodbine

Commodity prices and foreign exchange rate outcomes that are different to our

forecasts

Lack of exploration success and/or greater than expected geological complexities

Lack of funding to carry out adequate exploration and development

Adverse operational issues including from the effects of adverse weather

Adverse changes to business conditions from changed government policy

Adverse environmental and other regulatory issues

Cost overruns or other adverse impacts from development delays

Inappropriate acquisitions of other assets that divert management effort and yield

inadequate returns

We identify the following as the main share price drivers:

We have identified many upcoming events that could be significant share price drivers over

the next year or so:

Successful fraccing of the T Keeling #1H well that yields a strong IP with significant and

sustainable oil production and demonstrates that the appropriate fraccing recipe yields

strong results

Other successful production results from near term wells in the planning, including a

well with Petro-Hunt in the last quarter of 2013

Maiden Resource and Reserves estimates for the Amerril and Beeler Oil Projects from

significantly improved and sustained production

Successful roll-out of drilling, fraccing and completion of wells across the company’s

extensive land positions in the Woodbine that leads to the establishment of substantial

reserves for all areas and subsequent profitable and rapidly growing oil production with

strong cash generation from the wells in them

Further exploration drilling, fraccing and completion success in stratigraphically nearby

oil-bearing horizons other than the Woodbine that leads to the establishment of Maiden

Resource and Reserve estimates and subsequent substantial and profitable oil

production from all the oil-rich horizons in Sun’s East Texas areas

Successful application of the techniques of horizontal drilling and completion using

multi-staged fraccing of tight oil-bearing horizons in other appropriate oil-bearing

provinces elsewhere in the world


Appendix A: Technical aspects of the Woodbine Sandstone

The Woodbine Sandstone (Woodbine) is called by a number of different names but whatever it is called, it is a very important geological unit . In South Texas the Woodbine occurs as sandy sediments containing vast oil-rich hydrocarbon reservoirs that can yield impressive flow rates when fracced appropriately by horizontal wells, making it a highly profitable pay zone.

The Woodbine is an Upper Cretaceous age sandstone unit that occurs in the East Texas

Basin and interfingers with the Eagle Ford Shale. Named in 1905 and first exploited in the

1930s, the Woodbine (or Eaglebine as it is often referred to) is quite an extensive formation

that varies from 350 to 800 feet (107 to 243m) thick and comprises interbedded sandstone,

siltstone, limestone and shale. It is not a homogeneous unit with the basal part being

shalier and the upper part sandier. Some areas of it are notably more silty and it has been

subdivided into three slightly different sub-units – the Lower, Middle and Upper Woodbine

(also known as the Woodbine C, Woodbine B and Woodbine A respectively).

Sun believes that industry participants are using a number of different names to describe

the same target horizon that Sun is specifically targeting, such as the “Eagle Ford”,

“Eaglebine”, “Dexter”, “Maness Shale”, “Lower Woodbine” and the “Woodbine C”.

The Woodbine sits stratigraphically just below the Eagle Ford

The Woodbine is stratigraphically just below the Eagle Ford Group, which consists of three

units – the Sub Clarksville Sand, the Coker Sand and the Harris Sand (Figure 5).

Figure 5 - Stratigraphic column showing relationship of the Woodbine to other units

SOURCE: SUN RESOURCES NL


The Woodbine was formed during the Upper Cretaceous period from fluvial flow deposition

and marine sediments, the formation is widely spread across East Texas. The sands

thicken between the San Marcos arch to the west and Sabine uplift to the east. The play is

more shallow and oily to the northwest and becomes deeper and gassier to the southeast.

Within the Woodbine Sands, there are three broad divisions: The upper section has

numerous sandstone packages interbedded with organic-rich shales, the middle is more of

a sand and shale mixture and the lower Woodbine is more of a shale resource play. The

sandstone units are often large lenticular bodies that pinch-out up dip (to the north).

Individual sand units can be up to 30 feet thick and can consist of fine to medium-grained,

laminated sandstone with porosities ranging between 10 – 17% and permeabilities from

0.1 to 20 millidarcies.

The Woodbine sands have long been a target for conventional oil production. In the region

of Madison and surrounding Counties of Brazos, Grimes, Leon, Robertson, Houston and

Walker in East Texas there is a mini-basin, the Brazos Basin, which dips below the

southern edge of the Angelina-Caldwell Flexure, bordered by the Edwards-Sligo Rim to the

south, the San Marcos Arch to the west and the Sabine Uplift going east. The underlying

Buda Formation defines the bowl-like shape. This area has been the focus of most of the

horizontal well activity in the Woodbine. The upper, generally sandy part of the Woodbine

was the focus of early attention with horizontal wells but more recently the more extensive

and predictable Lower Woodbine, which is generally shalier, has attracted growing

attention of operators (Figure 6).

Figure 6 - Stratigraphic section across the East Texas Basin

SOURCE: OIL & GAS INVESTOR

The superior flow characteristics for wells in the Woodbine compared to wells in the Eagle

Ford Shale for production over the period to early in 2103 is shown in Figure 7. More

recent well performance in the Woodbine would accentuate this difference.

Figure 7 - Decline curves for Woodbine (LHS) and Eagle Ford Shale (RHS)

SOURCE: HALCON RESOURCES CORPORATION; OIL & GAS INVESTOR

http://epmag.com/context/Baker_Hughes_Incorporated/201003/unconventional_reservoirs.htm?k=Shale


PROFIT AND LOSS

Year ending 30 June Unit 2012a 2013e 2014e 2015e 2016e Assumptions FY10A FY11A FY12E FY13E FY14E FY14E

Revenue 0 0 14 82 271 Gold (US$/oz) #REF! #REF! #REF! 0 90 90

Expenses 0 (1) (8) (35) (116) US$/A$ #REF! #REF! #REF! #REF! 0.99 0.96

EBITDA 0 (12) (9) 29 133 Gold (A$/oz) #REF! #REF! #REF! #REF! 91 94

Depreciation and amortisation 0 (0) (4) (20) (43)

EBIT 0 (12) (14) 8 90 Equity Gold Production (000 ozs) FY10A FY11A FY12E FY13E FY14E FY14E

Net interest expense 0 0 (2) (8) (19) Southern Cross #REF! #REF! #REF! #REF! #REF! #REF!

PBT 0 (12) (16) (0) 71 Leonora - Gw alia #REF! #REF! #REF! #REF! #REF! #REF!

Tax Expense 0 0 0 0 0 - King Of The Hills #REF! #REF! #REF! #REF! #REF!

NPAT (reported) 0 (12) (16) (0) 71 Total #REF! #REF! #REF! #REF! #REF! #REF!

Adjustments (after-tax) Total cash cost incl royalty (A$/oz) #REF! 0 0 #DIV/0! 68 39

NPAT (adjusted) 0 (12) (16) (0) 71

JORC Resource Estimates Owned Mt g/t Au Au (koz)

PROFIT AND LOSS (INTERIM) Leonora - Gw alia 100% 15.7 8.3 4,187

Year ending 30 June Unit 2012a 2013e 2014e 2015e 2016e - King Of The Hills 100% 2.4 5.3 413

EBITDA Margin (%) na na -64% 35% 49% - Tow er Hill 100% 3.0 4.5 437

Effective tax Rate (%) #DIV/0! 0% 0% 0% 0% - Other 100% 5.9 2.0 377

EPS Reported (cps) #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! - Total 100% 27.0 6.2 5,414

EPS Normalised (cps) #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! Southern Cross - Marvel Loch 100% 6.0 3.2 614

EPS grow th (%) #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! - Transvaal 100% 3.4 4.9 535

Op. Cash Flow (cps) #REF! #DIV/0! #DIV/0! #DIV/0! #DIV/0! - Nevoria 100% 3.4 4.1 443

DPS (cps) #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! - Other 96% 7.0 2.8 631

Payout Ratio (%) #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! - Total 100% 19.8 3.5 2,223

Franking (%) #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! Total 46.9 5.1 7,637

Cash Flow Statement ($M) Leverage FY10A FY11A FY12E FY13E FY14E FY14E

Year ending 30 June Unit 2012a 2013e 2014e 2015e 2016e

Pre-Tax Operating Cash Flow #REF! #REF! #REF! #REF! #REF! #REF! Net Debt (Cash)/Equity #REF! 0% #DIV/0! #DIV/0! #DIV/0! #DIV/0!

Tax Paid #REF! #REF! #REF! #REF! #REF! #REF! Net Debt/(Cash)/Total Assets #REF! 0% #REF! #REF! #REF! #REF!

Operating Cash Flow #REF! 130 #REF! (2) (2) 29 Interest/(Income) Cover (x) nm nm nm nm nm nm

Exploration & Development #REF! (142) (110) (82) (72) (68)

Property, Plant & Equipment #REF! (12) (10) (8) (7) (6)

Other Investing Items #REF! 5 0 (6) (9) (15) Valuation Ratios (x) FY10A FY11A FY12E FY13E FY14E FY14E

Investing Cash Flow #REF! (150) (120) (96) (88) (88) Normalised P/E #DIV/0! #REF! #DIV/0! #DIV/0! #DIV/0! #DIV/0!

Inc/(Dec) in Equity #REF! Price/Op Cash Flow #REF! #REF! #REF! #DIV/0! #DIV/0! #DIV/0!

Inc/(Dec) in Borrow ings #REF! (4) (9) EV/EBITDA #REF! #REF! #DIV/0! -4.0 -11.4 7.7

Dividends and Other #REF! #REF! #REF! #REF! #REF! #REF! EV/EBIT #REF! #REF! #DIV/0! -4.0 -7.8 26.4

Financing Cash Flow #REF! #REF! #REF! #REF! #REF! #REF!

Inc/(Dec) in Cash #REF! (23) 0 0 0 0

Valuation

Balance Sheet ($M) FY10A FY11A 2012a 2013e 2014e 2015e

Cash #REF! 0 1 3 3 3 Leonora, Southern Cross Mines #REF! #REF! #REF! #REF!

Other Current Assets #REF! 57 #REF! #REF! #REF! #REF! Exploration & Oth. Mineral Assets #REF! #REF! #REF! #REF!

Property, Plant & Equipment #REF! 106 116 126 125 123 Total Mineral Assets #REF! #REF! #REF! #REF!

Exploration & Development #REF! 306 405 481 560 628 Net Financials2 #REF! #REF! #REF! #REF!

Total Assets #REF! 469 #REF! #REF! #REF! #REF! Total #REF! #REF! #REF! #REF!

Short-term Debt #REF! 10 0 0 39 121

Other Current Liabilities #REF! 57 #DIV/0! #DIV/0! #DIV/0! #DIV/0! Valuation Base: #REF! Upside : #REF!

Long-term Debt & Convert. Notes #REF! 2 17 52 Premium / (Discount) to share price #REF! #REF!

Other Non Current Liabilities #REF! 43 #DIV/0! #DIV/0! #DIV/0! #DIV/0! Valuation sensitivity to:

Total Liabilities #REF! 112 #DIV/0! #DIV/0! #DIV/0! #DIV/0! +/- 10% move in gold price #REF! #REF!

Total Equity #REF! 436 #DIV/0! #DIV/0! #DIV/0! #DIV/0! +/- 10% move in the $US/$A rate #REF! #REF!

Net Debt (Cash) #REF! 0 (1) (3) 53 170

Current price $0.00

Major Shareholders Million (%) Date Recommendation Buy

M & G Group - 0.0 0/01/00 Risk rating High

Van Eck Associates Corp - 0.0 0/01/00 12-month price target #REF!

J P Morgan Chase & Co - 0.0 0/01/00

SOURCE: COMPANY DATA; BELL POTTER SECURITIES ESTIMATES. Notes: 1. May not add because of dilution effects. 2. Includes corporate costs.



Sun Resources NL as at 5 August 2013

Recommendation Buy, Speculative

Price $0.032

Target (12 months) $0.095

Table 8 - Financial summary

SOURCE: BELL POTTER SECURITIES ESTIMATES

PROFIT AND LOSS FINANCIAL RATIOS

Year ending 30 June Unit 2012a 2013e 2014e 2015e 2016e Year ending 30 June Unit 2012a 2013e 2014e 2015e 2016e

Revenue A$m 0 1 13 73 258 NPAT (adjusted) A$m (4) (12) (13) 3 67

Expenses A$m (5) (13) (22) (50) (140) Adjusted EPS (Basic) A¢/shr (0.5) (0.6) (0.5) 0.1 2.2

EBITDA A$m (5) (12) (8) 24 118 EPS grow th % na na na na na

Depreciation and amortisation A$m (0) (0) (3) (13) (34) PER x na na na 32.7 1.4

EBIT A$m (5) (12) (11) 10 84 DPS A¢/shr - - - - -

Net interest expense A$m 0 0 (1) (7) (17) Franking % - - - - -

PBT A$m (4) (12) (13) 3 67 Yield % - - - - -

Tax Expense A$m - - - - - Free Cash Flow (FCF) A$m (2) (2) (42) (88) (104)

NPAT (reported) A$m (4) (12) (13) 3 67 FCF / share A¢/shr (0.2) (0.1) (1.6) (3.0) (3.5)

Adjustments (after-tax) A$m - - - - - Price / FCF x na na na na na

NPAT (adjusted) A$m (4) (12) (13) 3 67 FCF yield % na na na na na

EV / EBITDA x (14.6) (4.1) (15.0) 9.8 3.0

PROFIT AND LOSS (INTERIM) EV / EBIT x (14.5) (4.1) (11.2) 22.5 4.2

Year ending 30 June Unit Dec-11a Jun-12a Dec-12a Jun-13e Dec-13e EBITDA margin % na na na 32% 46%

Revenue A$m 0 (0) 0 1 5 EBIT margin % na na na 14% 33%

Expenses A$m (3) (2) (6) (7) (9) Return on assets % na na na 1% 18%

EBITDA A$m (3) (2) (6) (6) (4) Return on equity % na na na 8% 98%

Depreciation and amortisation A$m (0) (0) (0) (0) (1) LIQUIDITY & LEVERAGE

EBIT A$m (3) (2) (6) (6) (3) Net Debt (Cash) A$m (1) (4) 35 141 266

Net interest expense A$m 0 0 0 0 (1) Net Debt / Equity % -7% -14% 109% 404% 262%

PBT A$m (3) (2) (6) (6) (4) Net Debt / (Net Debt + Equity) % -7% -16% 52% 80% 72%

Tax Expense A$m 0 0 0 0 0 Net Debt / Total Assets % -7% -6% 29% 55% 53%

NPAT (reported) A$m (3) (2) (6) (6) (6) Net Debt / EBITDA % 27% 30% -418% 596% 225%

Adjustments (after-tax) A$m - - - - - EBITDA / Interest x (4.9) 2.9 6.2

NPAT (adjusted) A$m (3) (2) (6) (6) (6)

ASSUMPTIONS - Prices

CASH FLOW Year ending 30 June Unit 2012a 2013e 2014e 2015e 2016e

Year ending 30 June Unit 2012a 2013e 2014e 2015e 2016e Crude Oil (WTI) US$/bbl 94 92 90 91 93

OPERATING CASH FLOW Natural Gas (Henry Hub) US$/kft3 3.0 3.3 3.5 3.5 3.5

Receipts A$m 0 1 13 72 252 Condensate US$/bbl 87 85 83 83 83

Payments A$m (1) (3) (12) (41) (124) Natural Gas Liquids US$/bbl 61 60 59 59 59

Tax A$m - CURRENCY

Net interest A$m 0 0 (1) (7) (17) USD / AUD US$/A$ 1.03 1.03 0.91 0.88 0.85

Other A$m

Operating cash flow A$m (1) (2) (1) 23 111 ASSUMPTIONS - Product Sales

INVESTING CASH FLOW Year ending 30 June Unit 2012a 2013e 2014e 2015e 2016e

Cap Ex and exploration A$m (10) (16) (57) (128) (231) Crude Oil (WTI) Mbbl 0.1 0.6 2.0

Other A$m Natural Gas (Henry Hub) Bcf 0.2 1.0 3.5

Investing cash flow A$m (10) (16) (57) (128) (231) Condensate Mbbl 0.0 0.1

FINANCING CASH FLOW Natural Gas Liquids Mbbl 0.0 0.1

Net equity proceeds A$m 10 19 20

Debt proceeds A$m 45 171 341 CAPITAL STRUCTURE

Debt repayments A$m Issued Securities Unit

Dividends A$m Ordinary shares m 1,984.9

Other A$m Performance rights (exercisable at 0.1¢ by 30/4/17) m 140.0

Financing cash flow A$m 10 19 65 171 341 Unlisted options (exercisable at 2.5 - 12¢ betw een 6/1/14 to 3/5/16) m 173.3

Change in cash A$m (1) 1 7 19 46 Total m 2,298.2

Balance Sheet ($M) Major Shareholders

Year ending 30 June Unit 2012a 2013e 2014e 2015e 2016e M (%)

ASSETS Amerril Energy LLC 292.0 14.7% 12/09/12

Cash and short term investments A$m 1 4 11 30 75 JDK Nominees Pty Ltd 40.8 2.1% 31/03/13

Accounts receivable A$m 0 0 0 0 0 Dr W G Martinick 29.0 1.5% 3/07/13

Inventory A$m Gejaso Pte Ltd 18.2 0.9% 14/06/13

Property, Plant & Equipment A$m 0 0 9 18 27

Exploration & development A$m 17 53 101 210 401 VALUATION

Other A$m

Total assets A$m 18 57 120 257 503

LIABILITIES Exploration Assets - Texas, USA 369 0.13 1,103 0.38

Accounts payable A$m 0 0 2 2 2 - Other 6 0.00 15 0.00

Borrow ings A$m 0 0 32 119 239 - Total 374 0.13 1,118 0.38

Other A$m 0 0 2 3 4 Net Financials2 (27) (0.01) (27) (0.01)

Total liabilities A$m 0 0 49 179 355 Total 347 0.13 1,090 0.37

SHAREHOLDERS EQUITY

Share capital A$m 55 74 94 94 94 Current price $0.032

Reserves A$m 1 1 1 1 1 Recommendation Buy

Retained earnings A$m (38) (50) (63) (60) 7 Risk rating Speculative

Total equity A$m 18 25 32 35 102 12-month price target $0.095

Weighted average shares m 1,140 1,985 2,982 2,982 2,982

SOURCE: COMPANY DATA; BELL POTTER SECURITIES ESTIMATES. Notes: 1. On an equity diluted basis assuming effects of a share issue in FY14; may not add because of

dilution effects.

2. Includes corporate costs and additional equity.



Date of change


Bell Potter Securities Limited ACN 25 006 390 7721

Level 38, Aurora Place 88 Phillip Street, Sydney 2000

Telephone +61 2 9255 7200 www.bellpotter.com.au

Recommendation structure

Buy: Expect >15% total return on a

12 month view. For stocks regarded

as ‘Speculative’ a return of >30% is

expected.

Hold: Expect total return between -5%

and 15% on a 12 month view

Sell: Expect <-5% total return on a

12 month view

Speculative Investments are either start-up

enterprises with nil or only prospective

operations or recently commenced

operations with only forecast cash flows, or

companies that have commenced

operations or have been in operation for

some time but have only forecast cash

flows and/or a stressed balance sheet.

Such investments may carry an

exceptionally high level of capital risk and

volatility of returns.

The following may affect your legal rights. Important Disclaimer:

This document is a private communication to clients and is not intended for public circulation or for the use of any third party, without the prior approval of Bell Potter Securities

Limited. In the USA and the UK this research is only for institutional investors. It is not for release, publication or distribution in whole or in part to any persons in the two specified

countries. In Hong Kong this research is being distributed by Bell Potter Securities (HK) Limited which is licensed and regulated by the Securities and Futures Commission,

Hong Kong. This is general investment advice only and does not constitute personal advice to any person. Because this document has been prepared without consideration of

any specific client’s financial situation, particular needs and investment objectives (‘relevant personal circumstances’), a Bell Potter Securities Limited investment adviser (or the

financial services licensee, or the representative of such licensee, who has provided you with this report by arraignment with Bell Potter Securities Limited) should be made

aware of your relevant personal circumstances and consulted before any investment decision is made on the basis of this document.

While this document is based on information from sources which are considered reliable, Bell Potter Securities Limited has not verified independently the information contained

in the document and Bell Potter Securities Limited and its directors, employees and consultants do not represent, warrant or guarantee, expressly or impliedly, that the

information contained in this document is complete or accurate. Nor does Bell Potter Securities Limited accept any responsibility for updating any advice, views opinions, or

recommendations contained in this document or for correcting any error or omission which may become apparent after the document has been issued.

Except insofar as liability under any statute cannot be excluded. Bell Potter Limited and its directors, employees and consultants do not accept any liability (whether arising in

contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage (whether direct, indirect, consequential or otherwise)

suffered by the recipient of this document or any other person.

Disclosure of interest:

Bell Potter Securities Limited, its employees, consultants and its associates within the meaning of Chapter 7 of the Corporations Law may receive commissions, underwriting

and management fees from transactions involving securities referred to in this document (which its representatives may directly share) and may from time to time hold interests

in the securities referred to in this document.

A related party to Peter Arden owns 400,000 shares in SUR.

Disclosure: Bell Potter Securities acted as a broker to the $20m two-stage placement in August and September 2012 and received fees for that service.

Research Report August 2013

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