Published by Raymond James Ltd

Petromanas announced it has signed an agreement with a subsidiary of Royal

Dutch Shell (RDS.A-NYSE), whereby Shell will farm-in to onshore Blocks 2&3 in

Albania for a 50% interest. As consideration, Shell will pay cash and carry costs

up to $50.3 mln.

As shares of the company have tripled since late-December, we believe this

announcement has been largely priced into the stock. After adjusting our

model for the transaction, our target price has decreased to C$0.35/share,

from C$0.40/share previously. Given that our new target represents a 6%

return, we are lowering our rating to Market Perform, from Outperform.

This deal implies a value of ~$100 mln for Blocks 2&3. The consideration

includes a $16.3 mln cash payment, carry for up to $22.5 mln on Phase 1, as

well as the cost for 1 well in Phase 2. We note that a portion of the cash

consideration ($11 mln) is refundable to Shell if Petromanas secures a partner

for its other four blocks in Albania during the current exploration period (the

current exploration period for Blocks 2&3 expires on July 30, 2012).

We believe signing on a partner like Shell is very positive for Petromanas.

Moreover, Petromanas will maintain operatorship of the blocks, which we

believe is a vote of confidence from Shell and signifies the technical strength of

the company’s management team.

Plans in 2012 for Blocks 2&3 include spudding the first exploration well,

Shpiragu, in 2Q. The well is projected to cost between $22 mln – $25 mln and

to take 150 – 180 days to drill. The company also indicated its other drilling

plans remain unchanged for 2012, which include drilling 2 other exploration

wells; Jubani (Blocks A&B) in 1Q12 and Papri (Blocks D&E) in 4Q12. Following

this transaction, Petromanas is fully-funded for its 2012 program.

Our valuation is based on our risked contingent NAV of C$0.34/share, down

from C$0.41/share prior. Please refer to Exhibit 1 for details.

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