Monday, 29 July 2013

SPEC BUY Citation Resources Ltd (CTR)

Current Price $0.021
Target Price $0.065 Initiation – Guatemalan Gem
Analyst | Dave Wall
Ticker: CTR
Sector: Energy Quick Read
Shares on Issue (m): 901.9 Citation Resources has a ~60% working interest in block 1-2005, located onshore
- fully diluted (m): 1,151.9
Market Cap ($m): 18.9
Guatemala in the prolific South Peten Basin. The Company recently flowed 37 degree
Market Cap Diluted ($m) 24.2 API oil from its Atzam #4 well at an equivalent rate of >1,000 barrels of oil per day.
Net Cash ($m)*: 0.0
Enterprise Value ($m): 24.2
Current production is restricted to 140 barrels per day due to storage constraints.
* estimate Several prospective zones remain untested. Resource potential for Atzam is estimated at
52 wk High/Low: $0.044 $0.009
20 million barrels (gross). Fiscal terms in Guatemala are favourable, with operating
12m Av Daily Vol (m): 3.72 netbacks of ~50% of WTI.

The Company plans a follow-up well, Atzam #5, as early as September 2013 and is also
planning to workover two wells at the Tortugas Salt Dome, which flowed at historic rates
Valuation Risked Risked Unrisked
$m $/s $/s
of >1,500 barrels of oil per day and proven 2P reserves of 0.6mmbbl have been certified.
Atzam 94.1 0.082 0.18
Tortugas 12.0 0.010 0.03 Event & Impact | Positive
Other 10.5 0.009 0.09
Cash 1.0 0.001 0.00 Atzam – 20mmbbl Potential: The 600bopd achieved on test at Atzam #4 was from a
Debt -1.0 -0.001 0.00
Corp Admin -10.0 -0.009 -0.01
secondary target, with several other (potentially more) prospective zones remaining to
Options 8.9 0.008 0.01 be tested or behind pipe. The implication is that the excellent result to date is just the tip
Total 115.4 0.100 0.31
of the iceberg. An historic Independent Reserve and Resource Assessment has indicated
2.3mmbbl based on one well alone, with >20mmbbl potential for the entire field. Net to
CTR’s working interest this represents value of up to A$220m or $0.17.
Guatemala – Great Place to Find Oil: The South Peten Basin, in Guatemala, is an
extension of the prolific basins found in neighbouring Mexico; however, the region
remains relatively underexplored despite a high success rate (58 of 153 wells drilled
In A$ unless otherwise stated
have produced oil). Attractive fiscal terms mean that the 20mmbbl potential at Atzam
Share Price Graph alone could be worth ~A$370m (gross NPV10 unrisked).
$0.050 140.0
Tortugas – Proven Reserves: The Company has development potential at the nearby
$0.045
120.0
$0.040 Tortugas Salt Dome where proven 1P and 2P reserves are estimated at 0.3mmbbl and
$0.035 100.0
0.6mmbbl, respectively. Two historic wells flowed at >1,500 barrels per day on the field.
$0.030 80.0
$0.025 We estimate upside potential of ~4mmbbl at Tortugas.
$0.020 60.0

$0.015 40.0 Forward Work Program: CTR has a busy 6 months ahead with upgrade of surface
$0.010
$0.005
20.0 facilities and offtake likely to be complete by the end of August. Follow-up drilling at
$0.000 0.0 Atzam #5 is scheduled for September and two workovers are also possible by the end of
Jul-12 Oct-12 Jan-13 Apr-13
the year at Tortugas. Funding options are current being considered.

Recommendation
We have conservatively assumed production of 9.4mmbbl at Atzam, resulting in a
valuation of $0.08, net to CTR. Additional potential at Atzam and Tortugas could provide
upside >$0.20. It is early days so risk remains high; however, resolution of the funding
gap combined with upcoming newsflow from a Reserve update and drilling at both
Atzam and Tortugas is likely to result in a re-rating. We initiate coverage on CTR with a
Speculative Buy recommendation and a price target of $0.065.

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 Overview
First Up Success in Guatemala
Discovered oil reserves with Citation acquired a right to acquire its interest Block 1-2005 in Guatemala in July 2012.
appraisal and exploration upside The block has two existing discoveries with flow rates from historic wells of up to 1,500
onshore Guatemala – 1,000bopd barrels of oil per day. One of these discovered fields, Atzam, was successfully appraised
equivalent rate achieved from first by the recent Atzam #4 well, which flowed at an equivalent rate of 1,000 barrels of oil
well from one of several per day during testing in June 2013.
prospective zones
CTR’s interest in Block 1-2005 is indirect, through an agreement to earn 70% of the
shares of Latin American Resources (LAR). Recent conversion of debt funding by Range
Resources to equity has reduced CTR’s earning right to 60%. CTR will earn its interest by
spending US$13m (US$12m spent to date – part funded by Range) plus a loan carry for
60% interest in 2.9mmbbl 2P an additional US$12m (CTR share US$10.3m, Range US$1.7m) and has issued 160m
Reserves with 20mmbbl shares and 80m 4c options on achievement of milestones. In addition to the licences,
Contingent Resource as well as CTR will own, via LAR, two drilling rigs, a 50 man camp and an airstrip as well as surface
exploration upside facilities and drilling equipment. This represents ~US$18m of sunk capital. More detail
on the acquisition is provided in the Corporate Overview section of this report.

Rigs, camp, airstrip and other Figure 1: Project Locations

equipment all part of the original
acquisition

Extension of prolific Mexican

geology and nearby to analogue
field that has produced 30mmbbl

Source: Citation

First up success from Atzam #4 Significantly, the production at Atzam #4 was achieved from a zone that had not been
well from a zone that had not been flow tested in historic wells and was considered a secondary target. The primary zone
tested historically and an additional secondary target, with better log response that the zone tested,
remain behind pipe. An analogue field 17kms away, Rubelsanto, has produced ~30
million barrels from 8 wells since 1976 and is still producing at 800 barrels per day.

Followup drilling at Atzam #5 An historical Independent Reserve Assessment estimated 2P Reserves for Atzam #4 at
scheduled for September 2.3mmbbl, with 20mmbbl of 2C Contingent Resource potential in the rest of the field. A
followup well, Atzam #5, is scheduled for September. In the meantime, the Company is
progressing an offtake agreement and upgrading surface facilities to handle the likely

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Upgrade of surface storage should production volumes (we estimate 400 barrels of oil per day per well on a stabilised
see increase from current basis).
constrained rate of 140bopd to
400bopd Additionally, the Company plans to appraise the Tortugas Salt Dome (nearby to Atzam
on the 1-2005 permit), which produced at >1,500 barrels per day each from two historic
wells that are considered re-entry candidates. Estimated 1P Reserves for Tortugas are
0.3 million barrels with upside potential of 2.5 million barrels.

Second discovered field on block The Company is currently considering funding options to pay for the proposed work
has re-entry potential on two program.
wells, likely to occur prior to year
end Figure 2: Nearby Producing Fields

Source: Citation

1-2005 - Atzam (CTR 60%*)

History and Overview
Atzam history characterised by The history of the Atzam field is detailed below:
identification of significant  Atzam #1A discovered the field in 1988, drilled by Hispanoil. The discovery was
potential that was not effectively on the edge of the structure and considered non-commercial at the prevailing
exploited oil price. This well is now used for water disposal.

 Atzam #2 was drilled in 1993 by Basic Petroleum to a depth of ~1,400m and was
completed in the C-18 and C-19 formations with an initial test of 1,386 barrels
per day of 34 degree API oil. To date, the well has produced approximately
120,000 barrels of oil and is still producing at ~20 barrels per day.

 Atzam #3 was drilled by Quetzal Energy Ltd to a depth of 450m after failing to
reach the primary target due to pipe stuck in the hole after experiencing a
heavy gas kick whilst drilling. Tests run over the shallow C-13 horizon recovered
high quality 36 degree API oil; however, commercial flow was not established.

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Atzam #4 flowed 1,000bopd  Atzam #4 was drilled by Latin American Resource (CTR earning 60%) to a depth
equivalent rate from 7ft section in of ~1,300m, targeting the C-18 / C-19 formations. Heavy mud weight, deployed
C-17 horizon – many additional to safeguard against the kick experienced in Atzam #3, is thought to have
zones with similar or better log caused well bore washout, preventing logging or testing of these deeper
response to be tested horizons. The well has been completed in a 7ft section in the Upper C-17
horizon and flowed naturally at stabilised rates of 250-600 barrels of oil per day
on test with minimal water. Logging indicates good quality reservoir and oil
saturation in several other zones, including an additional 13ft zone in the Upper
C-17 and also the C-13 and C-14 (which are the main producing zones in the
nearby 30mmbbl Rubelsanto Field).

Figure 3: Log Data from Atzam #4 Well

Source: Citation

Atzam #4 producing at 140bopd Current production at Atzam #4 is 140 barrels of 37 degree API oil with little to no water,
th
constrained by surface storage constrained on an 8/64 inch choke and well head pressure of 360psi. Productivity on
open choke is estimated at >1,000 barrels per day; however, stabilised production is
likely to be closer to 400 barrels per day in order to maximise ultimate recovery.
Offtake agreement and upgrade to Production will be increased once an offtake agreement is signed and an upgrade to
surface facilities underway surface equipment is completed.

So, in summary, significant encouragement is evident in several horizons; however,

drilling issues have prevented conclusive testing of this potential. As described in more
detail in the Geology section below, conditions are not simple due to overpressure and
fractured reservoir. Modern day drilling and completion techniques with use of an
appropriate mud system should help overcome these complexities.

*There is a 3% overriding royalty interest on the permit (excluding Atzam #4), Atzam #2 working interest is
46%, Atzam #4/5 working interest is 54%, Quetzal has a right to participate for a 10% working interest in all
future wells

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 Reserve and Resource Potential
Historical Reserve estimate of An historic Independent Reserve Assessment by Oilfield Data Services (ODS) identified
2.3mmbbl – based on one well - 2.3 million barrels of 2P Reserves at Atzam based on one well alone. Internally identified
20mmbbl potential for the field potential for the entire field has been estimated at 20 million barrels on a 2C Contingent
basis. These numbers are based on data from 4 wells, including Atzam #4, vintage 2D
seismic as well as analogue production data from nearby fields.

Updated Reserve assessment An update to this report is current in progress and will be completed in the near term.
underway
Geology
The main formations of interest for CTR are the Coban horizons, which are Cretaceous in
Geology characterised by stacked
age. These horizons consist of interbedded limestone and dolomitised limestone, with
pay in fractured carbonate
most oil reservoirs being found in fractured dolomites in the B, C and D horizons.
reservoirs
Figure 4: Atzam Oil Field Cross Section

Source: Citation

Shallow marine source rock with Source is considered to be at various levels within the Coban B and C members, which
anhydrite and salt seal were deposited in a shallow marine environment behind a lagoonal bar. This has not
been conclusively proven, however. Seal is provided by interbedded anhydrites, allowing
for stacked reservoirs within the Coban formation.

Nearby Rubelsanto Field has Production from nearby analogue fields can be seen in the stratigraphic column below.
produced 30mmbbl and is still The main analogue for Citation is the Rubelsanto field, which produces mainly from the
producing at ~800bopd C-13 and C-14 horizons but also from deeper horizons, including the C-17. The Upper C-
17 horizon is productive in Atzam #4 and logs indicate that an additional zone in the
Upper C-17 as well as the C-13 and C-14 are also likely to be productive. The primary
targets in the field were thought to be the C-18 and C-19 due to the high flow rate
achieved in the Atzam #2 well from these zones. These were not able to be tested in the
Atzam #4 well and remain prospective.

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 Figure 5: Stratigraphic Column with Analogue Fields

Several fields nearby produce from

the same zone that are interpreted
to be productive at Atzam

Source: Guatemala Ministry for Mines and Energy

Forward Program
Atzam #5 scheduled for drilling in The Atzam #5 well is scheduled for drilling in September at a cost of US$3.5m (dry hole,
September – US$3.5m dry hole $4m completed), and will make use of recent lessons learned and operational risk should
cost decrease with each well drilled. Seismic is also likely and may cost $2-$3m.

The Company also plans to increase surface capacity from the current 7,000 barrels and
Increase in surface capacity and
finalise offtake before increasing production from Atzam #4 to ~400 barrels of oil per
offtake agreement likely to be
day (from the current rate of 140 barrels per day). This activity should be completed by
complete by end of August
the end of August.

Figure 6: Atzam Potential Drilling Locations

Source: Citation

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 1-2005 - Tortugas Salt Dome (CTR 60%*)
History and Overview
Tortugas discovery remains The Tortugas Salt Dome is located ~3kms to the north of Atzam and was originally a
undeveloped after two historic target for sulphur exploration in the 1970s. Three wells drilled on the northern flank of
wells flowed at high initial the salt dome flowed 28-32 degree API oil from the C-17 horizon at depths between
production rates – 1,500bopd – 1,300-1,800ft. The 63-4 and 63-5 wells both flowed oil in excess of 1,500 barrels per day
but were never fully drained in the 1980s before being suspended. Combined production from the two wells was
~80,000 barrels over total production time of 6 months. These wells are considered re-
entry opportunities with 1P reserves of 0.3mmbbl estimated.

Surface access has delayed Activity at Tortugas is expected to commence in the near term with initial focus on the
development but is likely to be workover of the 63-4 and 63-5 wells.
granted in near term
*working interest in two existing wells (63-4, 63-5) is 48%

Figure 7: Tortugas Location in Relation to Atzam and Rubelsanto

Source: Citation

Reserve and Resource Potential

Historical Reserve estimates (ODS, 2006) at Tortugas have indicated 0.3mmbbl of proven
1P and 2P Reserves independently 1P reserves, 0.6mmbbl of 2P and 3.8mmbbl of 3P Reserves. These estimates are based
certified 0.3mmbbl and 0.6mmbbl on well data, including the production history mentioned, and vintage 2D seismic.

Additional upside potential is also possible from features identified on surface

Other salt dome features can be expression that require additional seismic to firm up before drilling.
identified from surface expression
Geology
The Tortugas Salt Dome is a typical salt dome feature, formed by the vertical migration
Typical salt dome geology with of a thick salt layer through denser overlying sediment. The structure is evident on the
2
same target horizons as at Atzam surface with a 200m relief and 3km in area at its base (Tortugas means Turtle). In the

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 subsurface, sediment layers abut the flanks of the salt, forming a seal and allowing for
trapping of oil and gas.

Figure 8: Tortugas Salt Dome Feature

Stacked pay in carbonate
reservoirs with traps and seal
created by the salt dome feature

Source: Citation

Forward Program
Two wells had been produced Recompletion of the 63-4 and 63-5 is planned in the near term, once surface access has
intermittently but with little been finalised. Each of these may cost as little as $375k. Additional wells are also likely,
science – significant Reserves with cost estimates of $2.5m. Seismic to cover the structure would cost in the order of
remain with workover prior to $2.5m.
year end at little cost
Figure 9: 2013/14 Work Program

Busy forward program with

Reserve update, surface upgrade,
offtake agreement, spud of Atzam
#5 and workover of two Tortugas
wells

Source: Citation

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 Country Overview - Guatemala
History of under exploration Oil and Gas History
despite significant potential and Oil was first discovered at Tortugas in 1971 whilst exploring for sulphur. Since that time
several medium sized field several relatively small oil fields have been discovered, the largest of which is the 11,500
discoveries barrel per day Xan Field, operated by Perenco. The second largest field is Rubelsanto,
which has produced ~30mmbbl since 1976 from 8 wells and is still producing at ~800
barrels of oil per day. Both fields produce heavy oil (15-16 degree API) with low sulphur
content.

Current total in-country proven reserves are estimated at 83 million barrels of oil with
gross production of 14,000 barrels of oil per day. Usage per day is 71,000 barrels.

Oil and gas bid round recently Guatemala completed an oil and gas bid round in Feb 2013, where 6 companies were
completed granted exploration rights in July 2013 for 6 exploration blocks, with estimated work
commitments of ~$180m. An additional 2 blocks are expected to be released later this
year.

Fiscal Regime
Competitive fiscal terms result in The fiscal regime in Guatemala is a Production Sharing Contract that is attractive by
45% operating margin whilst cost global standards and is summarised below:
recovery in effect  Royalty of 20% +/- 1% for every degree API increase / decrease in oil gravity
from a base of 30 degrees API. E.g. 34 degree API equates to a 24% royalty
 30% state take for production under 20,000 barrels of oil per day – after full
deduction of all operating costs and capital costs but excluding royalties
 100% cost recovery
 31% corporate tax

Pricing
Most oil in Guatemala is sold at a ~30% discount to WTI due to low API (on average 16
degree API) and the presence of sulphur. The oil flowed from CTR’s Atzam field
historically was 34 degrees API with low sulphur and, more recently, 37 degrees API in
Atzam #4. Current sales to local users command a premium to WTI (as much as $20 per
bbl); however, these small end-users may not be able to handle the likely increased
volumes. Given this, we would expect the oil to be sold at close to parity with WTI.
Offtake agreements are currently underway.

Infrastructure
Whilst there is a pipeline with capacity at Rubelsanto, ~17kms away from Atzam, the
plan is to truck the oil ~300kms to the Puerto Barrios on the East Coast. Pipeline access is
complicated by differences in the quality / API of the oil as well as access and ownership
issues. Trucking capacity will handle the planned peak production rate of 3,500 barrels
of oil per day with cost estimated at ~US$8 per barrel.

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Board and Management
The following excerpt has been taken from the Company website.

Board
Mr Brett Mitchell - Executive Director
Mr Mitchell is a corporate finance professional with over 20 years of experience in the
finance and resource industries. He has been involved in the founding, financing and
management of private and publicly-listed companies in both executive and non-
executive directorship roles. He has held various roles as an executive of the Verona
Capital group, over the last 9 years.
Mr Mitchell holds a Bachelor of Economics from the University of Western Australia. He
is currently a Director of Transerv Energy Ltd, Erin Resources Ltd, Tamaska Oil and Gas
Ltd and Wildhorse Energy Ltd. He is also a member of the Australian Institute of
Company Directors (AICD).

Ms Sophie Raven - Non Executive Director

Ms Raven has practised corporate law for over 20 years both in Australia and overseas.
Since January 2007, Ms Raven has been a non-executive director of the offshore funds
managed by a European futures funds manager. Ms Raven is currently also the company
secretary for the Company and various other ASX-listed oil and gas companies, including
Wildhorse Energy Limited, Transerv Energy Limited, and Sunbird Energy Limited.

Mr Michael Curnow - Non Executive Director

Mr Curnow brings extensive experience in the resources sector in gold, platinum and
mineral sands exploration to the Company. He has been involved in the ownership and
management of a wide range of businesses in South Africa and Australia. He was a
founding director of Gallery Gold Ltd and AGR Ltd. Mr Curnow is also founding Director
of Adamus Ltd (Mongolia), Gallery Gold Ltd (Botswana), and Adamus Ltd (Ghana), with
all three currently in production. Mr Curnow is currently a Non-Executive Director of ASX
listed African Energy Resources Ltd and Energy Ventures Ltd.

Key Management
Mr Michael Realini
Mr Michael Realini serves as the Chief Operating Officer of Guatemala and President of
Guatemala at Latin American Resources (LAR). Mr. Realini served as President of Petro
Latina Bahamas (formerly, Mexpetrol of Taghmen Energy Plc from June 2004 to 2006. He
served as President and Chief Operating Officer of Quetzal Energy Ltd.

Mr. Realini has 20 years of experience in the oil and gas business, the last twelve of
which have been based in Guatemala. Before joining Mexpetrol of PetroLatina Energy
PLC in 2001, he was Vice President of Exploration at Pentagon Petroleum, Inc. from 1992
to 1998, and involved in El Condor Resources, the minerals division of Pentagon from
1998 to 2004. He has also worked as an exploration and development geologist with KCA
Baron/Firecreek Petroleum, Sunmark Exploration Company and Amoco Production
Company. He served as Director of Quetzal Energy Inc. since 2007. Mr. Realini holds
both Bachelors and Master of Science degrees in Geology from the University of
Northern Illinois.

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Corporate Overview
Structure
The Company current has 901m shares on issue and we assume will issue an additional
250m shares as part of a capital raising. There are 221.75 listed options (CTRO) on issue
with a strike price of $0.04 and an expiry date of 31 December 2015. The Company has
$1m in short term debt and cash is ~$350k.

Acquisition Overview
In July 2012, Citation entered into an agreement to earn 70% of Latin American
Resources (LAR) by funding 100% of the drilling and completion costs of two wells on the
Atzam Oil Project, at an estimated total cost of US$7m, and then an additional finance
carry of US$18m total for total expenditure of US$25m. The agreement was recently
amended so that the 70% earn-in milestone will vest upon total project expenditure
exceeding US$13m (~US$12m spent to date), with a finance carry on the US$12m
balance.
In addition, 53m ordinary shares and 26.5m 4c (Dec 15) options were issued as
consideration upon execution of the agreement. Other milestone shares and items are
summarised below:
 Upon commercial testing of Atzam #4, in excess of 200bopd, an additional 53m
shares and 26.5m options were issued.
 Upon election to participate in a second well 54m shares and 27m options were
issued.
 A 3% gross overriding royalty on production (pre-existing) – excludes Atzam #4
 Cash payment of US$1m on spudding of a second well or seismic to be paid by
LAR as final acquisition cost of the project (paid in Q1 2013, part of current
project expenditure total funded by CTR)
A subsequent agreement with Range Resources resulted in a loan to CTR, which was
converted to shares at $0.02 (212m shares). Range also has a 10% carried interest in LAR
and a 10% funding interest.
In addition to the initial project financing and recent CTR working capital funding by
Range, CTR has spent US$4.55m and has issued 160m vendor shares and 80m vendor
options. Additionally, CTR has issued 212m shares to Range, as described above. Range
has spent US$7.6m to date. The remaining US$12m to be spent as part of the acquisition
will be split 6/7 to CTR and 1/7 to Range. This is a loan carry, which will be paid back as a
priority out of the majority of the carried parties’ share of production.

So in summary, upon completion, CTR will have paid $12.3m in cash plus shares and
provided a $3.6m loan carry for its 60% interest in LAR.

As part of the consideration, CTR will earn indirect ownership in the following
equipment:
 Tubulars and other equipment in place to drill and complete 3 development
wells
 Treatment and storage facility built with 7,000 barrel capacity
 Fully functional airstrip at Tortugas camp
 Full working camp with 50 person capacity
 Fully reconditioned 500 hp Harold Lee trailer mounted drilling rig
 Refurbished Wilson 38 Service Rig

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Funding options currently under
Funding
consideration – we assume $5m The planned work program for the Atzam #5 well, upgrading of surface facilities and
equity raise at $0.02 workovers at Tortugas is likely to cost in the order of $5.5m gross. CTR will fund 85%
(Range is paying the other 15%) of these costs or $4.7m. Early cash flow from Atzam #4
at 400bopd is likely to generate $0.5m per month in net cashflow to CTR (whilst cost
recovery and tax losses are in effect). Given this, the Company is likely to require
additional funds in the near term and funding options are currently being considered.

Valuation
Low opex / capex in favourable The fiscal regime in Guatemala is set out in the Country Overview section. Our base case
fiscal regime -> base case valuation project assumptions for Atzam are detailed below:
for Atzam of $100m (net to CTR)  Initial production per well of 400 barrels per day
based on 9.4mmbbl (gross)  Estimated Ultimate Recovery per well of 1.2mmbbl
 Capex per well of US$5m (completed)
 Opex per barrel US$18 (US$8 lifting cost, US$8 trucking cost, US$2 oil tariff)
 Number of wells = 8
 Total reserves recovered = 9.4mmbbl
 Long term oil price of US$90, FX $0.85
These assumptions, combined with the fiscal terms, result in gross project NPV of
A$165m. Net to CTR’s working interest, this equates to A$94m or $0.08.

Upside from 20mmbbl potential at If we model the full 20mmbbl potential for the field, this results in valuation (net to CTR)
Atzam is $0.18 for CTR of A$210m or $0.18.

The implied NPV10 per barrel at Atzam is $17.50, which we have used for notional
valuation for Tortugas and other exploration potential.

Tortugas adds risked value of $0.01 We have assumed 3.8mmbbl of potential at Tortugas with a 30% chance of success,
with upside potential of $0.03 resulting in a valuation of $12m or $0.01. The upside potential is $0.03.

Additional exploration potential Several Salt Dome features and Atzam look-a-likes have been identified on early analysis
adds risked value of $0.01 with and we have assumed potential of 10mmbbl (gross total) for these with a chance of
$0.09 upside potential success of 10%. This results in value of $10.5m or $0.009 with upside of $0.09.

Our valuation summary is detailed below:

Figure 10: Valuation Summary
Valuation Summary $m $/sh
Atzam 94 0.08
Tortugas 12 0.01
Other 11 0.01
Cash 1 0.00
Debt -1 0.00
Corp Admin -10 -0.01
Options 9 0.01

Total 115 0.10

Source: Argonaut

Total unrisked upside potential is The unrisked upside potential is estimated at $0.31.
$0.31
Our price target is a qualitative discount to our valuation based on perceived takeover
Speculative Buy with price target premium, size and liquidity. In the case of CTR, the appropriate discount is considered to
of $0.065 be 35%, resulting in a price target of $0.065. We are initiating coverage on CTR with a
Speculative Buy recommendation.

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Risks
Technical
The main producing reservoirs at Atzam are fractured carbonates, which by nature have
variability in composition, requiring natural fractures for high productivity. Extensive
faulting in the area increases the chance of fractures but also increases geological
complexity. Areas of overpressure also require heavy mud weights that can damage
reservoir. Operational risk is considered a key risk in light of these factors; however, we
note that operational performance has improved (although not perfect) for the drilling
of the Atzam #4 well.

Country
Guatemala has had a relatively stable democratic government since 1985 and has oil
production since the 1970s. The oil and gas regulatory framework is relatively mature
and the Country recently completed a bid round. There is a strong drive to develop the
potential of Guatemala’s oil and gas sector and the fiscal regime is favourable. Country
risk is considered low – moderate.

Funding
The forward work program is currently unfunded; however, given the quantum of funds
required and the success achieved to date, we are confident that this will be resolved in
the near term. Planned seismic next year may be funded from cashflow (~$1m per
month net cashflow to CTR is possible from two wells at Atzam) and it is likely that debt
funding will become an option once more wells are on production.

Commodity
Commodity price risk is subject to risks related to global growth outlook and political
factors, for which ongoing uncertainty remains; however, we view the longer term
fundamentals for the complex as strong. There is currently a lack of visibility on the likely
received price until offtake has been finalised; however, we view the risk of a substantial
(>$5 per bbl) discount to WTI as minimal.

Commercial
Citation has a 60% indirect interest in the 1-2005 block through its ownership in LAR,
who retains operatorship. Whilst the relationship with LAR is considered strong, the
existence of a majority ownership without operational control is not ideal.

Corporate Advisers | Stockbroking & Research | Special Situations Financing | Page 13

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