Kea Petroleum : Update of Strategic Review

Kea Petroleum plc (AIM: KEA), the oil and gas company focused on New Zealand, makes the following announcement by way of an update to the previously announced strategic review.
We have referred in recent announcements to our relatively new Shannon prospect in New Zealand (the "Shannon Prospect"). The Shannon Prospect is ready to drill and is located directly beneath our Puka production station. In the past five years we have spent more than £22 million on the PEP51153 licence area, which includes Puka and Shannon.
We have also referred in recent announcements to the impact of the current oil price and the effect it has had on the funding of exploration projects. Whilst we continue in discussions to secure a farm-in partner under the strategic review process we are also investigating alternative funding opportunities to drill the Shannon Prospect ourselves.

THE SHANNON PROSPECT

The Shannon Prospect is a potential oil field in the Tikorangi limestone formation, some 1,000 meters underneath Puka Mount Messenger sand reservoir. This same limestone formation produced 24.0Mmbbls on the next door mining permit in a field called Waihapa not owned by the Company.
The Directors have determined that the Company's principal goal should be to enable the drilling of the Shannon-1 well in 3rd quarter of 2015. Shannon-1 would we believe be a high impact well, in a prospect that the Company estimates has a gross unrisked mean prospective resource of 9.62Mmbbls. Kea has a 70% interest in the permit (PEP
51153) (the "Exploration Permit") and our joint venture partner MEO New Zealand Ltd ("MEO") holds 30%.
Since its admission to AIM five years ago Kea has invested in the region of £22 million to determine the potential of its licence area PEP51153, which contains the Puka oil field and production station. The total combined knowledge of 2D and 3D seismic studies, drilling the Douglas well down to the Tikorangi, drilling Puka-1, 2, 3 and the Wingrove-
2 wells to the Mount Messenger reservoir, as well as the reprocessing and re-mapping of data from all the wells and the seismic provide us with an increasingly sophisticated understanding of the permit area.
Due to the previously announced cash constraints facing the Company, Kea's future is precarious, and it is frustrating that Kea has an exciting prospect ready to drill and located immediately under our Puka production station. The Company is therefore investigating the possibility of raising funds for the preparation and drilling of a well to test the Shannon prospect in the Tikorangi limestone as well as meeting operational and corporate overheads to the end of the drilling stage. It is also a priority of the company to resume production from Puka-1 & -2 and drilling Shannon-1 has the additional potential of making a further Mount Messenger intersection, which could increase volumes from Puka-1 & -2 to a positive cash-flow in today's price environment.
In the current oil price environment, many companies are reassessing their expensive offshore portfolios, as onshore conventional prospects can withstand lower prices. If we make a discovery in the Shannon Prospect of 9.62Mmbbls recoverable, then over 15 years, presuming an average of US$70/bbl (in the opinion of the Directors a reasonably conservative forward view), this translates into US$673M of gross income. Assessed costs of

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production and capital expenditure for these volumes are approximately US$30/bbl, leaving a net income to the
Company of US$40/bbl.
In addition, fractured limestone reservoirs often have very high initial flow rates. In the adjoining Waihapa field, production wells began with flow rates between 1,000 bopd up to 10,000 bopd. Translated, even at today's prices of approximately US$60/bbl, that is from US$60,000 to US$600,000 gross income per day attributable to the Shannon prospect during an initial production period should the Shannon well achieve such flow rates.
Even if Shannon 1 is not a success, there is a potential second prize for Kea. The Shannon-1 well is expected to intersect the Mount Messenger sandstone reservoir, above the oil-water contact, that Kea has previously penetrated from the shallower Puka wells. As a safety net for investors in any future fundraising, the well will be drilled so there is a fall back production scenario from the Mount Messenger reservoir if, as expected, it contains oil. Production from another Mount Messenger well with similar characteristics to Puka-1 and Puka-2 would improve the economics of resuming production from these wells. However, there is no guarantee that an intersection of oil at the Mount Messenger level will sufficiently change the economics of the field to justify restarting production, especially at current prices.
We anticipate that there will be significant interest in the Company in the lead up to and during the drilling of
Shannon-1, should we raise sufficient funds to drill it.
The total capital we would need to raise in any future fundraising would be in the region of £3.0 million, and these funds would be used for the preparation and drilling of a well to test the Shannon prospect in the Tikorangi limestone as well as to meet operational and corporate overheads to the end of the drilling stage.
Our 30% joint venture partner in the Exploration Permit, MEO, has indicated that it may be prepared to contribute toward drilling the prospect. Kea will continue to try to find a farm-in partner to assist in the drilling of Shannon-1 via the formal process previously announced through Rockpoint Corporate Finance Ltd. Nevertheless the funds which we are seeking through our ongoing discussions would be aimed to provide Kea with sufficient capital to drill Shannon-1 independently. Under the terms of the joint venture agreement with MEO, if Kea funds the whole of the drilling, it is primarily entitled to the full benefit of production but MEO has the right at a later date to buy back into the well by reimbursing Kea for its proportionate share of the costs incurred plus a substantial penalty payment.

GEOLOGICAL ASSESSMENT

The Company's geologists have assessed the likelihood of Shannon-1 being a success as approximately 20% and with internal estimates of gross un-risked prospective mean resources of approximately 9.62Mmbbls, 18.22Mmbbls on an unrisked P10 basis and 2.57Mmbbls on an unrisked P90 basis. Additionally our geologists believe there is approximately a 50% probability of finding a Mount Messenger oil column on the way down to the Shannon prospect, although it is not presently certain how much value such a Mount Messenger completion might mean for a Kea shareholder.
There is a probability of complete loss, even if we make a Mount Messenger reservoir intersection.
Success with drilling Shannon-1 would have a major impact on the future of the Company. Commercialisation of an oil discovery could be expeditious given the current production infrastructure on the Puka site.
The Directors estimate that a discovery of a field with 9.62Mmbbls of recoverable oil producing at 1,000bopd places
a net present value on Kea's current share of the field in excess of US$120 million (£80 million).
The Directors consider it important that the Company is in a position to drill the Shannon-1 well and is investigating ways to raise the required funds. The Directors consider it important that they have the ability to raise further

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capital to meet the Company's ongoing working capital requirements, and to take advantage of any upturn in the equity markets, which continue to be challenging for junior oil and gas exploration companies. Consequently the Company intends shortly to convene a General Meeting on 8 May 2015 to seek authority to issue shares to be in position to raise equity funds should it agree terms with investors.
The Company's current cash resources are expected to be sufficient for its immediate working capital needs until shortly after the date of the General Meeting. If the Company does not raise sufficient funds, the Company would not have cash resources to meet its ongoing commitments in relation to exploration activities, or maintain current levels of working capital expenditure and would need to consider alternative options including disposals of assets, likely to be at "fire sale" values if achievable at all, or a sale of the Company at a price that the Directors believe would not recognise the potential long-term value of the business. In addition, should the Company or its subsidiaries be forced to make an arrangement with creditors or suffer some other insolvency event then title to its exploration assets could be lost.
The Company will make further announcements in due course.

This release has been approved by non-executive director Peter Mikkelsen FGS, AAPG, who has consented to the inclusion of the technical information in this release in the form and context in which it appears. In compiling its resource estimates, the Company has used the definitions and guidelines as set forth in the 2007 Petroleum Resources Management Systems approved by the Society of Petroleum Engineers.

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For further information please contact:

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