merril lynch update

2011 has been a very tough year for KAR investors to date, with share price
down ~40% on little news flow. With KAR looking forward to a more active 2012
we see a much improved investment case. KAR is drill ready in Australia and
KAR is trading cheaply given its potential. It sits near the bottom of its
international peer group on valuation metrics

(see Figure transaction multiples (~$1.1/boe+ for prospective Brazilian oil / gas and $0.6 –
$3.6/boe for contingent Australian gas).
Paying only $0.45/boe of risked prospective / contingent resource is an attractive
entry point for a stock with such an active drilling program over the next 12 to 24
months.


MOST INTERESTING IS THIS


We believe KAR offers this upside potential. As evident from Figures 3 and 4 we
value KAR at $9.59ps (pre-NPV discount) on a risked basis but if we assume a
50% chance of exploration success this rises to $35.12ps. While this may
seem improbably high we would note that current exploration success rates in the
southern Santos basin are trending at 55%.
Importantly this valuation only considers 6 of KAR’s more mature Santos Basin
prospects versus 20+ targets we expect to see across Brazil and Peru by end-11.