Georox Resources Inc. (TSXV: GXR / FRANKFURT: OF6A ... · The company’s projects currently...

Siddharth Rajeev, B.Tech, MBA, CFA Analyst

March 6, 2015

2015 Fundamental Research Corp. “10+ Years of Bringing Undiscovered Investment Opportunities to the Forefront” www.researchfrc.com

PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

Georox Resources Inc. (TSXV: GXR / FRANKFURT: OF6A) – Initiating Coverage – Junior Oil Producer Growing Through Acquisitions Sector/Industry: Junior Oil & Gas www.georoxresources.com Market Data (as of March 5, 2015)

Current Price C$0.07 Fair Value C$0.17 Rating* BUY Risk* 4 (Speculative) 52 Week Range C$0.05 - C$0.11 Shares O/S 35,646,185 Market Cap C$2.50 mm Current Yield N/A P/E (forward) 3.3x P/B 0.7x YoY Return 16.7% YoY TSXV -32.3%

*see back of report for rating and risk definitions

Investment Highlights Georox Resources Inc. (“company”, “Georox”, “GXR”) is a junior oil

producer with projects in Alberta (“AB”) and Saskatchewan (“SK”), Canada. The company’s projects currently produce 180 boepd consisting of 132 boepd light oil, 46 boepd heavy oil, and 2 boepd gas.

In 2014, Georox acquired assets producing approximately 150 bopd in Red Earth, AB, for $6.1 million. The acquisition enabled the company to almost triple its daily production.

Net income in the first nine months of 2014 was up by 93% YOY to $0.87 million (EPS: $0.02).

According to Sproule, at the end of 2014, the company had proved and probably (“2P”) reserves of 0.52 MMBoe (gross), and 0.43 MMBoe (net). Sproule estimated a Net Present Value / “NPV” @10% (after-tax) of $9.86 million. Georox’s enterprise value, which is currently $7.82 million, is 21% lower than the after-tax NPV estimate.

At the end of Q3-2014, the company had $0.97 million in cash. Working capital was negative $3.00 million due to a line of credit used by the company for the Red Earth acquisition.

The company plans to continue to grow organically and through acquisitions. Like most junior oil & gas producers, the sharp decline in oil prices has

prompted the company to take a cautious approach over the next six months. They have not planned any major development activities until the summer.

We initiate coverage on GXR with a BUY rating, and a fair value estimate of $0.17 per share.

Risks Revenues and profitability of the company depend heavily on future oil

prices. Exploration, development and production risk. Debt to capital was high at the end of Q3-2014. The company may not be

able to extend the term of the $2.20 million debt facility due in April 2015. The company may have to pursue equity financings for future acquisitions,

which may dilute existing shareholders.

Key Financial Data (in C$) 2011 2012 2013 2014E 2015EProduction Revenues $1,409,921 $1,818,083 $1,692,039 $4,609,174 $4,329,945EBITDA $202,515 $571,172 $509,124 $1,909,216 $1,022,688Net Income $74,023 ($1,372,336) ($410,384) $766,962 ($870,766)Cash $2,517,017 $90,492 $0 $98,417 $15,242Working Capital $2,753,350 $449,754 ($919,289) ($3,201,431) ($4,091,132)LT Debt / Capital - - 4% 25% 25%Assets 4,819,750 3,847,671 4,471,014 10,405,526 10,370,059

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http://www.georoxresources.com

2015 Fundamental Research Corp. “10+ Years of Bringing Undiscovered Investment Opportunities to the Forefront” www.researchfrc.com PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

Overview

Georox Resources Inc., headquartered in Calgary, Alberta, is a junior oil producer focused on projects in Alberta and Saskatchewan. The company was incorporated in April 2003 as Oromonte Resources Inc. Its shares began trading on the TSX Venture Exchange under the symbol “ORR” in March 2005, through a reverse takeover. ORR was in the mineral exploration business with projects in Ecuador and BC, Canada. In August 2008, the company completed a 3:1 share consolidation, and changed its name to the current name. By mid-2009, the company decided to move out of the mineral exploration business to focus on producing junior oil and gas projects. Mr. Burkhard Franz, who had been a director of the company since 2006, was made the new Chief Executive Officer. Since 2009, Georox has completed a series of acquisitions to assemble a portfolio of oil (with minor gas) projects in AB and SK. The following map shows the location of the company’s key projects.

Source: Company

The following table shows the growth in the portfolio’s 2P reserves, and NPV estimate, since 2009. A $6.1 million acquisition in Red Earth, Alberta, led to a significant increase in the reserve estimate, and NPV, in 2014.



Prepared by:

Gross Net Gross Net BT@10%

AT@10%

Gross Net

DeGolyer and MacNaughton

2009 40.0 31.0 $0.90 $0.73 4.0 1.3

DeGolyer and MacNaughton

2010 32.0 28.0 $0.87 $0.78 4.0 1.3

PNG Consultants Ltd 2011 37.2 31.2 123.4 109.6 $4.84 $3.48 13.0 2.1

PNG Consultants Ltd 2012 36.6 34.2 89.7 81.3 $3.67 $2.61 13.0 1.8

Sproule 2013 59.1 53.0 97.0 90.8 $4.83 $4.74 16.0 3.3

Sproule 2014 425.0 346.2 50.3 47.0 $10.63 $9.86 37.0 14.0

Producing WellsLight Oil (2P Reserves)- Mbbl

Heavy Oil (2P Reserves)- Mbbl

NPV ($,M)

According to Sproule, at the end of 2014, the company had 2P reserves of 0.52 MMBoe (gross), and 0.43 MMBoe (net), consisting 81.6% light oil, 9.7% heavy oil, and 8.7% gas. Sproule estimated a NPV@10% (before-tax) of $10.63 million, and a NPV@10% (after-tax) of $9.86 million. Georox’s enterprise value, which is currently $7.82 million, is 21% lower than the after-tax NPV estimate. Sproule used an average price of $70.35/bbl in 2015, $87.36/bbl in 2016, gradually increasing to $111.87/bbl by 2025 for Canadian light sweet crude oil. We believe these price estimates are reasonable. Our outlook on oil, and consensus price estimates, are provided in the “Oil Price Outlook” section later in this report. Three projects in the company’s portfolio have reserve estimates. The following table shows each project’s reserve and NAV estimates. Red Earth, with 2P reserves of 0.38 MMBoe (gross) and 0.30 MMBoe (net), accounted for 76.7% of the overall NPV estimate. The projects in AB accounted for 91% of the total NAV.

Remaining (Mbbl)

Company Gross (Mbbl)

Company Net (Mbbl)

Company Gross (Mboe)

Company Net (Mboe)

NPV@10% (BT) - $MM

% of Total

Red Earth 376.2 376.2 301.9 7.0 6.5 $8.15 76.7%Pouce Cope 96.0 48.9 44.3 32.0 30.5 $1.48 13.9%Alberta 472.2 425.0 346.2 39.0 36.8 $9.63 90.6%

Silverdale 733.9 50.3 47.0 - - $1.00 9.4%Saskatchewan 733.9 50.3 47.0 - - $1.00 9.4%Total 1,206.1 475.3 393.2 39.0 36.8 10.626 100.0%

Oil Gas

Source: Sproule

The current production is approximately 180 boepd (37 wells gross and 14 wells net), consisting of 132 boepd of light oil, 46 boepd of heavy oil, and 2boepd of gas. The following chart shows Sproule’s production estimates. Production is expected to average 213 boepd in 2015, and peak to 244 boepd in 2016, and gradually decline in subsequent years to 94 boepd by 2020, and to 6 boepd by 2034. In order to achieve this production scenario, Sproule estimates a total capital investment (CAPEX) of $5 million over the next



Red Earth / Otter (light oil) – 95 boepd net

two years, and no subsequent CAPEX thereafter.

Source: Sproule

The company plans to continue to grow organically and through acquisitions. The sharp decline in oil prices has resulted in a significant drop in M&A (mergers and acquisitions) transactions. Although we expect WTI crude oil prices to recover and surpass US$60/bbl by the end of the year, a significant number of juniors will be severely impacted if a recovery does not take place. Such a scenario will create a lot of opportunities to acquire distressed assets at reasonable valuations. As Georox has a relatively low operating cost (the current average operating plus royalty cost is $32/bbl), we believe they will be able to weather a soft market. Our discussions with management indicated that they are going to take a cautious approach, and are not planning any development activities until the summer. The following sections present an overview of the company’s key assets. Georox acquired interests in the Red Earth area in northwest Alberta in April 2014. The seller was private oil and gas producer, Mosaic Energy. The project is located approximately 106 km north of Lesser Slave Lake (320 km northwest of Edmonton). The total production from the properties at the time of acquisition was 150 boepd (98% light oil).



The acquisition consisted primarily of: a 100% working interest (“WI”) before payout, and a 97% WI after payout, in 2.125

sections in Red Earth consisting of nine producing oil wells, and

a 100% WI in 9.25 sections in Otter (located 25 kms to the NW of Red Earth)

Of the nine producing wells, eight vertical wells focus on the Granite Wash formation, and one horizontal well focuses on the Slave Point formation. Georox is the operator of all the producing wells. The Slave Point formation, which is comprised of brown limestone, crystalline dolomite and shale laminae, is a stratigraphical unit of the Middle Devonian (Paleozoic) age. Its thickness is typically uniform and is approximately 30m (net pay of 9 – 12m) in the region. Depth is approximately 1,500 m, and each well is expected to hold 125 – 200 Mbbl of recoverable oil (assuming a 20% recovery). The Granite Wash is also Devonian in age, and overlie the Precambrian basement of the Peace River Arch (shown in the chart below). Its thickness is approximately 12m (net pay 8m) in the region. Each well is expected to hold 100 Mbbl of recoverable oil (assuming a 26% recovery).

Source: ERCB

Granite Wash Slave Point



The porosity and permeability of both Granite Wash and Slave Lake are relatively good among the Paleozoic formations. Although these formations have been developed for decades using vertical wells, advancements in horizontal drilling and hydraulic fracturing have led to an increase in focus on them over the last decade. It is estimated that successful waterflooding on the formations can significantly increase recovery rates to 30% - 35%. The region is operated by several well-known companies, including Penn West (TSX: PWT), Pinecrest (TSXV: PRY), Baytex (TSX: BTE), Devon Energy (NYSE: DVN), Renegade Petroleum (TSXV: RPL), etc. The following map shows the locations of the key players in the region.

Source: Company

According to Sproule, at the end of 2014, the project held 0.38 MMBoe (gross), and 0.30 MMBoe (net) in 2P reserves. Sproule estimated a NAV@10% of $8.15 million (before-tax), or $26.43/boe of 2P reserves. Georox’s purchase price was $6.10 million, reflecting a valuation multiple of approximately $40,667 per boepd, and $20 per 2P reserves. Production from this project has dropped since the acquisition to the current rate of 95 boepd. Management attributes the drop to possible formation damage yet to be determined. The company intends to conduct a pressure build up test to determine if recompletion alternatives should be initiated to ramp up production.



Silverdale Property (heavy oil) – 48 boepd net

The company has the following plans for the project:

2 vertical infill holes at Granite Wash locations (Red Earth) 1 horizontal Slave Point location (Red Earth) 2 horizontal Slave Point locations (Otter) 2 recompletion wells - management believes production from each well can be

increased from under 5 boepd to 25-40 bopd upon fracing, with a cost budget of approximately $0.11 million.

Water flood program - the company expects to convert one of its wells to a water injector, and install a separator to remove water for a total cost of $1.3 million. As mentioned earlier, water flood has the potential to improve recovery from 20% to the 30-35% range.

The expected initial production (“IP”) is approximately 100-120 bopd, dropping by 25 - 50% in year 1, and 15% p.a. thereafter. The vertical wells are expected to be 1,400 m deep. As for the horizontal wells, the horizontal legs are estimated to be 800 m. The expected capital cost of a vertical well is approximately $1.60 million to drill/equip and complete. The capital cost of a horizontal well is estimated at $3 million. Sproule’s reserve report only accounts for the upside from the two proposed vertical wells at Granite Wash. However, in our valuation models (presented later in the report), we have accounted for upside from the Slave Point locations listed above. As mentioned earlier, the company is currently taking a cautious approach, and does not intend to conduct any of the proposed plans prior to this summer. If the proposed program at Red Earth is successful, we expect that they can potentially increase production from this project to over 300-400 boepd. This is the company’s second key project. The company had initially entered into an agreement to acquire a 15% interest in 1,040 acres of land in the Lloydminster area in SK for $650,000 in September 2009. Subsequently, the acreage was pooled with adjacent land (operated by Husky Energy; TSX: HSE) to form a common area of interest covering 840 acres. Georox received a 6.9% working interest (“WI”) on the pooled area. Husky maintains a significant interest with a 45% – 50% ownership. 2-D and 3-D seismic study results on the region confirm the presence of an undeveloped oil bearing Mannville channel of the Cretaceous group. Wells in the Mannville group typically hold 100 Mboe of reserves (typically 14 API). In the Llyodminster region, the formation thickness is typically 15 – 60 m. Depth is approximately 600 m. The Mannville Group in the Llyodminster area is divided into nine members, as shown in the chart below.



Source: CSPG

Georox’s focus is on the Sparky and the General Petroleum (GP) formations. Husky and its partners (including Georox) drilled four horizontal wells in late 2011 on GP (costing $4.70 million gross and $325,000 net to Georox). All of the wells were successful and currently produce at 296 bopd gross or 20 bopd net to Georox. Subsequently, in late 2013, four additional horizontal wells were drilled (also on GP) for a gross cost of approximately $5,640,000 ($390,000 net to Georox). Combined, the eight wells are currently producing approximately 40 bopd net to Georox. The operator and its partners believe the project can support another 8 wells, costing $12.60 million ($870,000 net to Georox), or approximately $1.6 million per well. Due to the oil price uncertainty, Husky has yet to announce their plans on the project. The IP of the past wells have been approximately 120 bopd gross (8 bopd net to GXR). The decline rate of the wells is typically 15% per year. The well depths are typically 600 m, with horizontal legs of 1,400 m. The project also has eight vertical wells on the Sparky zone, which are producing 53 boepd gross, and 8 boepd net to Georox. Northern Blizzard Resources (TSX: NBZ) is the operator. These wells were drilled in 2011. This land lies outside the pooled area, and therefore, GXR holds a 15% WI as per the original agreement. A vertical well was drilled in late 2013 targeting the Sparky zone for approximately $0.5 million. Although unsuccessful, the well encountered 12 m of oil pay in the GP channel sand. According to management, the operator expects to follow up this well with further horizontal drilling in 2015 – 2016. The operator’s plan is to conduct infill drilling (50 m spacing going down to 25 m spacing), followed by the implementation of a water flood to improve the overall recovery. Their plan is to drill 1 or 2 more Sparky wells in the next 12 months.



Pouce Cope, AB (light oil) – 29 boepd net

The following map shows the location of the wells.

Source: Company

According to Sproule, at the end of 2014, the project had approximately 0.74 MMBoe of recoverable oil. Georox’s 6.9% equates to 50 Mboe (gross), and 47 Mboe (net) of 2P reserves. Sproule estimated a NAV@10% (before-tax) of $1.00 million, or $21.21/boe on the 2P reserves. As the company’s WI is low, we believe this project offers low upside potential to the company compared to the other projects in its portfolio. The key advantage of the project is that it has established partners (operators). In summary, we believe the project offers the company potential for long and steady cash flows, with low risk exposure. In May 2013, the company acquired oil and gas interests located in the Pouce Coupe area in northwest Alberta from Chinook Energy Ltd. (TSX: CKE) for $2 million. The acquisition included three producing vertical cells, including a 52.42% WI in one section, 50% in a 0.25 section, and 100% in the remaining 0.25 section. Two wells are operated by Georox, and one well is operated by Birchcliffe Energy (TSX: BIR). The wells are currently producing approximately 29 boepd net (57 boepd gross) from the Boundary Lake formation. Depth is approximately 1,600 m, and each well is expected to hold 50 Mbbl of recoverable oil. The annual decline rate is approximately 5%. The company believes there is potential for infill drilling and/or horizontal wells on the acquired lands. According to Sproule, at the end of 2014, the project had approximately 96 Mboe of recoverable oil. Georox’s interest equates to 81 Mboe (gross), and 75 Mboe (net) proved



Other Projects Management Team

and probable reserves. Sproule estimated a NAV@10% (before-tax) of $1.48 million, or $19.76/boe on the 2P reserves. The company does not have any immediate plans for this project. The following section presents a brief summary of the company’s other projects. None of these projects were assigned 2P reserves in the recent reserve report by Sproule. Coteau Lake: In May 2012, Georox entered into an agreement on lands in the Coteau Lake area in southeastern Saskatchewan and northeast Montana. This project is focused on light/medium Mississippian oil in the 2,000 m range. As per the agreement, Georox had to pay 100% of the farmee's 85% of the costs to drill and complete a horizontal test well to earn a 31.875% WI before payout, and 21.25% after payout, in 0.25 sections of land on which the test well is located, and on another 0.25 sections. Primrose Drilling Ventures (a private company based out of Calgary) is the farmee. Subsequent to Georox earning its initial interest, Georox may participate in option wells to earn a 31.875% before payout, and 21.25% after payout, by paying 42.5% of the costs to drill, complete and equip those wells. The test well was drilled in July 2012, and is currently producing at approximately 25 bopd gross (8 bopd net). As the water disposal cost of the well is high, the operator is evaluating a water disposal scheme. A horizontal well was completed, and tested in February 2013, for a total cost of $1.97 million, and $0.84 million to GXR. The well also encountered high volumes of water. As a result, operations have been suspended pending further geological and geophysical reviews. Although Sproule’s reserve report does not assign any value on this project, our models account for the potential future cash flows from the producing well. Kitscoty Property: In June 2010, Georox signed a farm-out agreement with a company in Alberta to earn a 25% WI in 160 acres of land in the Lloydminster area of Northern Alberta for $220,000. This project is not in production.

Northern Alberta Farmouts: Georox has 100% WI on 640 acres in Swan Hills, and a 96%WI on 640 acres in Virginia Hills in Northern Alberta. Georox also has 100% on 1,440 acres in the Meekwap area (nisku prospect). All these regions are prospective for light Devonian oil. According to the May 2014 Management Information Circular, management and the board of directors own 25% of the outstanding shares. The high equity ownership, we believe, is positive, as it aligns management and investors’ interests. According to management, the remaining shares are primarily held by retail investors. Brief biographies of the management, as provided by the company, follow. Daryl Fridhandler, Q.C., Chairman Daryl S. Fridhandler, Q.C. is a Partner with the law firm of Burnet, Duckworth & Palmer



LLP and practices as a member of the firm's corporate, securities, mergers and acquisitions and commercial transactions groups. He has been active as a founder, director, officer or legal counsel of numerous for profit (public and private) and not for profit organizations, including government related entities. He was Chairman and a director of Innova Exploration Ltd. (TSX) (Cdn $400,000,000 on sale), Mr. Fridhandler has over 25 years experience in various legal and business aspects of the oil and gas business. Mr. Fridhandler was the Chairman and a director of Palliser Oil and Gas Corporation (TSXV) until recently. Palliser filed for creditor protection this month. Mr. Fridhandler, subsequently, resigned from this position. In October, 2008, he was appointed to the Calgary Police Commission and is presently a Vice Chairman. Mr. Fridhandler is also a member of the Institute of Corporate Directors. Burkhard Franz, President and Chief Executive Officer Burkhard Franz has been an entrepreneurial business man for over 35 years. He has over 20 years experience in the international resources equity markets. He has held several executive positions with varied responsibilities in mining and oil and gas companies in Canada and Ecuador, South America. He brings a comprehension of financial equity markets and management of oil operations to the Corporation. He has raised equity capital for several companies in the mining and oil and gas industries. He started his career owning and directing several silviculture projects in Austria and Canada, and owning, directing and managing resort projects in Austria. Mr. Franz has actively served as President and director on boards of many private and public companies. Mr. Franz graduated from the federal college for Agriculture and Forestry in Raumberg, Austria. He earned an engineering degree in Agriculture from the Ministry of Agriculture and Forestry, Vienna, Austria in 1977. Mr. Franz is fluent in German and English. Lorraine McVean, Director Lorraine McVean is a practicing lawyer engaged in the provision of legal consulting services to various entities in the oil and gas industry. Prior to becoming a consultant, she was a senior legal executive and officer of an intermediate public oil and gas company. Ms. McVean's legal practice has been focused on mergers and acquisition activity and acquisition and divestiture of oil and gas assets. Ms. McVean has extensive experience with publicly traded companies, having served on the Board of Directors and Audit Committees of several companies listed on the TSX Venture Exchange. Ms. McVean is also a member of the Board of Directors of the YWCA of Calgary, a not-for-profit charitable organization. Ms. McVean holds a Bachelor of Arts degree in Political Science from the University of Calgary and a Bachelor of Laws from the University of British Columbia. She is a recent graduate of the Directors Education Program at the Haskyne School of Business and is a member in good standing of the Law Society of Alberta and the Canadian Institute of Corporate Directors. Wayne Fast, P.Eng., Vice President Operations and Corporate Planning Mr. Fast has held numerous positions over the last thirty nine years with junior, medium



Oil Price Outlook

and large multinational oil and gas corporations. His positions have focused primarily on drilling, production, and operations matters in Western Canada and also on mergers and acquisitions. Mr. Fast has served in positions with Saskatchewan Oil and Gas Corporation (Wascana) and Amerada Hess (Canada), Canadian Pioneer Energy Inc. Prime West, Foothills Oil and Gas Ltd. and RSX Energy Inc. Mr. Fast has also acted as a consultant to numerous enterprises. Mr. Fast earned a BSc in Chemical Engineering from University of Saskatchewan and his Certificate in Management Development from University of Calgary. He is a member of the Association of Professional Engineers and Geologists of Alberta and the Society of Petroleum Engineers. Savi Franz, Chief Financial Officer Ms. Savi Franz has over 25 years of industry experience broadly distributed across finance and accounting functions at escalating seniority and has progressively held more responsible positions. Ms. Franz has previously proven herself proficient in the organization of accounting systems and processes in early stage, growing oil and gas companies including Georox Resources Inc. She has also taken on integral supervisory roles in an operational environment and has been instrumental in successful acquisition efforts. Ms. Franz has held a position of increasing responsibility at Price Waterhouse/Coopers (Trinidad and Tobago), Ladbrokes Holdings PLC (U.K.), Ashpaltic Holdings (PLC (U.K.) and more recently at several Canadian junior oil and gas companies. Ms. Franz holds diploma/degree in Finance and Accounting at N.E.L.P./South West London College, U.K. The recent dip in oil prices (as shown in the chart below) has prompted most of the major oil producing companies to announce significant spending and job cuts for this year.

Source: Macrotrends

We believe the oil price drop is associated with three factors – a strong US$, the buildup of oil inventory over the past six to nine months, and OPEC’s (Organization of the Petroleum



Exporting Countries) decision to not cut production / supply. The following chart shows the inventory build by the end of 2014.

Historically, OPEC has reduced supply to keep prices from dropping too low. However, they were reluctant to do so this time. The emergence of U.S. shale oil production in the past few years has been reducing OPEC’s global market share (see chart below).

OPEC’s share dropped from 44.1% as of 2008, to 42.5% as of 2013. During the same period, the US’s share of global production increased from 6.8% to 9.8%. As shown below, Saudi Arabia is now the only OPEC country in the top five global producers.



Source: EIA

OPEC countries are highly reliant on oil revenues. The following chart shows how much oil contributes to their Gross Domestic Product (GDP). More than 50% of the GDP of Kuwait and Libya comes from oil. Oil accounts for more than 40% of Saudi Arabia’s GDP. Despite their high reliance, the main reason why we believe OPEC has decided not to cut supply is to maintain their global market share, so that they can continue to dominate the oil industry.

Source: CNBC / World Bank

The following table shows a few key metrics of the global Oil and Gas Industry in 2014. Considering the average debt level of 38.7%, we believe a significant number of oil



producing companies will be in distress if oil stays at this level for the rest of the year.

2014

Gross Margin 33.40%Net Margin 4.60%

Total Debt to Capital 38.70%EBIT / Interest Expense 5.6x

Return on Equity 7.30%

Source: Capital IQ The following chart shows that production costs are much higher in regions outside the Middle East.

If oil is not above US$60 per barrel, a significant portion of U.S. shale development production/development will need to be suspended. Since shale oil production accounts for almost 50% of U.S. production (3 - 4 million barrels a day), we may see a major decline in oil production if oil prices remains low. The excess capacity of the OPEC countries will not be able to offset the loss of production. As shown in the chart below, OPEC’s current excess capacity is just over 2 million barrels a day.



The global demand for oil is expected to grow at 1.1% p.a. The EIA estimates the global supply of crude oil, other liquid hydrocarbons, and biofuels, is expected to be adequate for only 25 years.

2010 2011 2012 2013 2014 (E) 2015(E) 2016(E)

United States 19,180 18,882 18,490 18,961 China 8,938 9,504 9,980 10,117 Japan 4,429 4,442 4,695 4,531 India 3,115 3,281 3,450 3,509 Russia 3,082 3,352 3,395 3,320 World 87,858 88,800 89,721 90,379 91,390 92,390 93,390 Growth 3.4% 1.1% 1.0% 0.7% 1.1% 1.1% 1.1%

1000's of Barrels / Day

In conclusion, we believe that if the price of oil is not above US$60 – US$70 per barrel, a significant portion of global production/development will be suspended. Exploration and development spending will drop drastically. At the same time, the global demand for oil is expected to continue to increase. We also believe that OPEC may be prompted to reduce their supply over the next 3 – 6 months. This is because we estimate that if they cut supply, the upside from oil prices will more than offset the decline in production, resulting in stronger revenues for its members. Therefore, we expect oil to move above U$60 by the end of the year. Oil price forecasts through 2025 are shown below. Based on consensus forecasts, Canadian light sweet oil prices are expected to average $62/bbl in 2015, $85/bbl in 2016, and gradually increase from there to $113/bbl by 2025.



Financials

Oil (Canadian Light Sweet 40API; $/bbl)

Source: GLJ and Sproule

The following table shows the company’s production and netbacks since 2009.

2009 2010 2011 2012 2013 2013 (9M) 2014 (9M)

Production - boepd (net) 49 47 43 83 62 58 157 Production Revenues $49.27 $50.66 $68.57 $44.24 $67.77 $80.65 $83.49Royalties ($21.63) ($23.29) ($22.21) ($15.67) ($7.11) ($7.59) ($11.67)Operating Costs ($19.79) ($23.45) ($25.23) ($8.06) ($20.60) ($21.65) ($20.25)Operating Netback $7.84 $3.91 $21.13 $20.51 $40.06 $51.41 $51.56General & Admin Costs ($40.03) ($40.11) ($27.23) ($16.44) ($24.64) ($28.20) ($14.47)Capex - $ mm ($0.58) ($1.17) ($0.41) ($3.27) ($1.64) ($1.37) ($6.33) *Oil accounted for over 90% of production most of the time Production in the first nine months of 2014 (ended September 30, 2014) was 157 boepd net, up from 58 boepd net in the comparable period in 2013. The company posted record production of 204 bopd net in Q3-2014. Revenues (before royalties) in the first nine months were $3.59 million, up from $1.28 million in the same period in the previous year. Revenue and production growth was due to the Red Earth acquisition in 2014. The jump in production in 2012 was primarily a result of the successful drilling at Silverdale. The subsequent drop in production in 2013 was because the Silverdale wells had to be temporarily shut in (3 – 4 months) when four new wells in the area were being drilled in late 2013. As mentioned earlier in the report, the four wells drilled in 2013 were also successful. Our forecast for average production in 2014 is 163 boepd. Our forecast for 2015 is 220 boepd. Our revenue forecast for 2015 is $4.61 million. Despite the higher production forecast, we have a lower revenue forecast of $4.33 million for 2015 due to lower oil price estimates.



The company’s operating costs typically ranged between $20 and $25/bbl since 2009. The operating netback in the first nine months of 2014 was $51.56/boe, versus $51.41/boe in the comparable period in the previous year. EBITDA in the first nine months of 2014 was $1.58 million, up 327% YOY from $0.37 million in the same period in the previous year. Net income in the nine month period was $0.87 million (EPS: $0.02) versus $0.45 million (EPS: $0.02) in the comparable period. Our forecast for 2014 is net income of $0.77 million (EPS: $0.02), and for 2015, we expect a net loss of $0.87 million (EPS: -$0.02). Although EBITDA is expected to remain positive in 2015, we expect an increase in interest and depreciation expense will lead to a net loss for the company. The following table shows a summary of the company's cash flows since 2009. Cash Flow Summary 2009 2010 2011 2012 2013 2013 (9M) 2014 (9M)CFO ($73,193) ($145,467) ($162,639) $848,121 $606,290 $141,241 $910,837CFI ($632,024) ($423,126) ($424,133) ($3,274,646) ($1,642,065) ($1,369,140) ($6,326,016)CFF $50,000 $2,898,860 $0 $0 $125,000 $125,000 $2,740,835Change in Cash ($655,217) $2,330,267 ($586,772) ($2,426,525) ($910,775) ($1,102,899) ($2,674,344)

Free Cash Flows (for the firm) ($654,845) ($1,285,295) ($552,175) ($2,432,665) ($596,378) ($1,227,899) ($5,415,179)Fund Flows from Operations(FFO) ($90,733) ($218,921) $251,886 $642,244 $481,385 $395,251 $1,487,637 The company reported $1.49 million in fund flows from operations in the first nine months of 2014, up from $0.40 million in the comparable period in the previous year. Free Cash Flows (“FCF”) in the nine month period were negative $5.42 million due to the $6.1 million Red Earth acquisition. At the end of Q3-2014, the company had $0.97 million in cash. Working capital and the current ratio, were negative $3.00 million, and 0.3x, respectively. The working capital deficit was because the company had used up $3.50 million of a $4.55 million line of credit for the Red Earth acquisition.

2008 2009 2010 2011 2012 2013 Q3-2014

Cash $2,925 $84,170 $133,058 $459,237 $593,383 $548,044 $969,561Working Capital $1,375,627 $1,456,460 $2,914,225 $2,753,350 $449,754 ($919,289) ($3,004,467)Current Ratio 18.22 8.26 10.03 12.75 1.66 0.39 0.27 Total Debt - - - - - 945,283 5,819,627 Total LT Debt - - - - - 125,000 2,325,000 Total Equity $2,136,638 $1,842,831 $4,270,245 $4,384,637 $3,033,958 $2,592,254 $4,031,700Capital $2,136,638 $1,842,831 $4,270,245 $4,384,637 $3,033,958 $3,537,537 $9,851,327Debt/Capital 0% 0% 0% 0% 0% 27% 59%LT Debt/Capital 0% 0% 0% 0% 0% 4% 24%Debt/FFO - - - - - 1.96 2.93 EBITDA/Interest n/a n/a n/a n/a n/a 20.53 6.88

In addition to the line of credit, the company has a $2.20 million short-term debt facility payable in April 2015. Management has indicated that they are in discussions with the lender, and believe they will be able to extend the term by one year. If they are unable to negotiate an extension, we believe the company may face a liquidity crunch. As mentioned



Valuation

earlier, the company had approximately $1 million unused on its line of credit, which it can use if and when needed. Stock options and warrants: At the end of Q3, the company had 1.48 million options (weighted average exercise price of $0.14), and 4.23 million warrants (weighted average exercise price of $0.14) outstanding. All of them are currently out of the money. Our fair value estimate on the company’s shares is $0.17 per share. The following table shows a summary of our valuation.

0% 5% 10% 15% 20%

NAV (after tax) of P+P Reserves, net of corporate G&A expense$31,090,885 $18,259,552 $11,263,160 $7,156,301 $4,600,999

PV @ 10% $11,263,160

Working Capital - LT Debt ($5,329,467)

Fair Value $5,933,693

No of outstanding shares 35,646,185

Fair Value / Share (C$) $0.17

Net Asset Value

Our estimate of the after-tax NAV@10% of $11.26 million is different from Sproule’s $9.86 million estimate primarily because of the following:

We used the consensus oil price forecasts (presented earlier in the report), which are slightly different from Sproule’s forecasts.

Our models include corporate level G&A expenses. Note that Sproule estimated the NAV of GXR’s projects, while our models estimate the fair value of GXR’s shares.

As mentioned earlier, we have included the Red Earth/Otter project’s upside potential. Sproule’s reserve report only accounted for two new wells.

Our models include potential cash flows from Coteau Lake. The reserve report did not assign any reserves for Coteau Lake.

The following table shows the sensitivity of our fair value estimate to change in oil price forecasts. For example, a 10% increase in the base-case oil price forecast will increase our fair value estimate from $0.17 to $0.26 per share.

Sensitivity of fair value to changes in oil price forecasts

-20% -10% 0% 10% 20%

$0.00 $0.09 $0.17 $0.26 $0.35

The following table shows the enterprise value (“EV”) to daily production, and EV to 2P reserves, of junior oil producers of similar size as GXR.



Risks

Company SymbolEnterprise

Value ($, MM)

Gross 2P Reserves(MMboe)

Daily Production

(boepd)EV / boepd EV / boe

BT-NAV@10% , $MM

EV / NAV

Tuscany Energy Ltd. TUS $15.50 2.86 1000 $15,500 $5.42 $61.90 25%LGX Oil+Gas Inc. OIL $21.40 5.60 860 $24,884 $3.82 $75.47 28%Hawk Exploration Ltd. HWK.A $14.90 1.81 750 $19,867 $8.22 $42.86 35%Anterra Energy Inc. AE.A $22.90 5.70 598 $38,294 $4.02 $84.63 27%Hemisphere Energy Corporation HME $28.00 2.10 1025 $27,317 $13.33 $38.20 73%Northern Spirit Resources NS $17.80 4.19 440 $40,455 $4.25 $71.30 25%Forent Energy Ltd FEN $11.60 1.52 255 $45,490 $7.63 $21.40 54%3MV Energy Corp. TMV $9.20 1.69 400 $23,000 $5.43 $18.32 50%RedWater Energy Corp. RED $6.70 1.64 273 $24,542 $4.09 $25.73 26%Georox Resources GXR $7.82 0.52 180 $43,471 $15.03 $10.63 74%

Average $30,282 $7.12 38% As shown in the table above, the average EV / boepd is $30,282, and the average EV to boe is $7.12. The EV of these juniors currently sits at 38% of their before-tax NAV@10% estimates. We believe Georox’s current EV multiples are higher relative to its peers because the 2P reserve estimate, and the current daily production, do not reflect the upside potential of its projects. As our cash flow analysis captures the company’s upside potential from management’s near-term development plans, we believe our valuation of $0.17 per share is a good indicator of the fair value of GXR’s shares. Based on our review of the company’s projects, we initiate coverage on GXR with a BUY rating, and a fair value estimate of $0.17 per share. The following risks, though not exhaustive, may cause our estimates to differ from actual results: Revenues and profitability of the company depend heavily on future oil prices. Exploration, development and production risk.

Debt to capital was high at the end of Q3-2014. The company may not be able to extend

the term of its $2.20 million debt facility due in April 2015. The company may have to pursue equity financings for future acquisitions, which may

dilute existing shareholders. We rate the shares risk 4 (speculative).



APPENDIX

Income Statement 2011 2012 2013 2014E 2015EYE - December 31 (C$)

Production Revenues 1,409,921 1,818,083 1,692,039 4,609,174 4,329,945 Royalties (344,930) (475,532) (160,665) (644,553) (662,267) Production Revenues (net of royalties) 1,064,991 1,342,551 1,531,374 3,964,621 3,667,678

Operating Costs 391,820 244,605 465,580 1,200,089 1,766,600 Gross Profit 673,171 1,097,946 1,065,794 2,764,532 1,901,078

General and administrative 422,937 498,767 556,670 836,562 878,390 Stock-based compensation 47,719 28,007 18,754

EBITDA 202,515 571,172 509,124 1,909,216 1,022,688

DD&A 166,550 1,902,191 1,302,841 1,336,891 1,507,080 EBIT 35,965 (1,331,019) (793,717) 572,325 (484,392)

Interest Expense (7,418) (6,388) 24,801 366,259 386,374 EBT 43,383 (1,324,631) (818,518) 206,066 (870,766)

Exploration (96,092) (6,462) Gain on transactions 30,640 248 560,896

Income from discontinued operations 48,139 414,596 Income tax expenseNet Income (loss) for the period 74,023 (1,372,336) (410,384) 766,962 (870,766) EPS, Basic 0.00 (0.05) (0.02) 0.02 (0.02)



Consolidated Balance Sheets 2011 2012 2013 2014E 2015EYE - December 31 (C$)

Current AssetsCash and cash equivalents 2,517,017 90,492 98,417 15,242 Accounts receivable 459,237 593,383 548,044 575,446 604,219 Available for sale investments 11,375 4,777 23,332 23,332 23,332 Assets held for sale 438,056 Discontinued operationsInventory 18,604 18,604 18,604 Total Current Assets 2,987,629 1,126,708 589,980 715,799 661,397

Property & Equipment 1,304,846 1,955,012 3,088,676 8,862,682 8,855,602 Exploration assets/others 527,275 765,951 792,358 827,045 853,060 Total Assets 4,819,750 3,847,671 4,471,014 10,405,526 10,370,059

Current LiabilitiesBank debt 820,283 3,194,627 3,994,627 Payables 234,279 574,302 672,347 705,964 741,263 Decommissioning 102,652 16,639 16,639 16,639 Total Current Liabilities 234,279 676,954 1,509,269 3,917,230 4,752,529

Loan 2,200,000 2,200,000 Payable to shareholder 125,000 125,000 125,000 Deferred income taxDecommissioning 200,834 136,759 244,491 244,491 244,491 Total Liabiliies 435,113 813,713 1,878,760 6,486,721 7,322,020

Shareholders' EquityShare capital 9,566,011 9,302,776 9,302,776 9,843,611 9,843,611 Contributed surplus 2,243,905 2,535,147 2,535,147 2,553,901 2,553,901 Deficit (7,425,279) (8,803,965) (9,245,669) (8,478,707) (9,349,473) Total Shareholders' Equity 4,384,637 3,033,958 2,592,254 3,918,805 3,048,039

Total Liabilities and Shareholders Equity 4,819,750 3,847,671 4,471,014 10,405,526 10,370,059



Consolidated Statements of Cash Flows 2011 2012 2013 2014E 2015EYE - December 31 (C$)

Operating ActivitiesNet Income (Loss) 74,023 (1,372,336) (410,384) 766,962 (870,766)

Adjustments :Stock-based compensation 47,719 28,007 - 18,754 - DD&A 166,550 1,983,117 1,302,841 1,336,891 1,507,080 Finance expense (5,766) 3,704 3,524 Gain on transactions (30,640) (248) (414,596) (560,896) Funds Flow from Operations 251,886 642,244 481,385 1,561,711 636,314

Change in Working CapitalAccounts receivable (326,179) (134,146) 45,339 (27,402) (28,772) Inventory (18,604) - - OtherPayables (88,346) 340,023 98,170 33,617 35,298 Net cash provided by operating activities (162,639) 848,121 606,290 1,567,926 642,840

Investing ActivitiesProperty & Equipment (338,075) (3,035,970) (1,626,185) (6,550,001) (1,500,000) Investments (11,375) Exploration & Evaluation Assets (74,683) (238,676) (15,880) (34,687) (26,015) Net cash used in investing activities (424,133) (3,274,646) (1,642,065) (6,584,688) (1,526,015)

Financing activitiesEquity 540,835 Debt 5,394,627 800,000 Shareholder 125,000 Net cash provided by financing activities - - 125,000 5,935,462 800,000

Increase (decrease) in cash (586,772) (2,426,525) (910,775) 918,700 (83,175) Cash, beginning of period 3,103,789 2,517,017 90,492 (820,283) 98,417 Cash, end of period 2,517,017 90,492 (820,283) 98,417 15,242



Fundamental Research Corp. Equity Rating Scale: Buy – Annual expected rate of return exceeds 12% or the expected return is commensurate with risk Hold – Annual expected rate of return is between 5% and 12% Sell – Annual expected rate of return is below 5% or the expected return is not commensurate with risk Suspended or Rating N/A— Coverage and ratings suspended until more information can be obtained from the company regarding recent events. Fundamental Research Corp. Risk Rating Scale: 1 (Low Risk) - The company operates in an industry where it has a strong position (for example a monopoly, high market share etc.) or operates in a regulated industry. The future outlook is stable or positive for the industry. The company generates positive free cash flow and has a history of profitability. The capital structure is conservative with little or no debt. 2 (Below Average Risk) - The company operates in an industry where the fundamentals and outlook are positive. The industry and company are relatively less sensitive to systematic risk than companies with a Risk Rating of 3. The company has a history of profitability and has demonstrated its ability to generate positive free cash flows (though current free cash flow may be negative due to capital investment). The company’s capital structure is conservative with little to modest use of debt. 3 (Average Risk) - The company operates in an industry that has average sensitivity to systematic risk. The industry may be cyclical. Profits and cash flow are sensitive to economic factors although the company has demonstrated its ability to generate positive earnings and cash flow. Debt use is in line with industry averages, and coverage ratios are sufficient. 4 (Speculative) - The company has little or no history of generating earnings or cash flow. Debt use is higher. These companies may be in start-up mode or in a turnaround situation. These companies should be considered speculative. 5 (Highly Speculative) - The company has no history of generating earnings or cash flow. They may operate in a new industry with new, and unproven products. Products may be at the development stage, testing, or seeking regulatory approval. These companies may run into liquidity issues, and may rely on external funding. These stocks are considered highly speculative. Disclaimers and Disclosure The opinions expressed in this report are the true opinions of the analyst about this company and industry. Any “forward looking statements” are our best estimates and opinions based upon information that is publicly available and that we believe to be correct, but we have not independently verified with respect to truth or correctness. There is no guarantee that our forecasts will materialize. Actual results will likely vary. The analyst and Fundamental Research Corp. “FRC” does not own any shares of the subject company, does not make a market or offer shares for sale of the subject company, and does not have any investment banking business with the subject company. Fees were paid by GXR to FRC. The purpose of the fee is to subsidize the high costs of research and monitoring. FRC takes steps to ensure independence including setting fees in advance and utilizing analysts who must abide by CFA Institute Code of Ethics and Standards of Professional Conduct. Additionally, analysts may not trade in any security under coverage. Our full editorial control of all research, timing of release of the reports, and release of liability for negative reports are protected contractually. To further ensure independence, GXR has agreed to a minimum coverage term including two reports. Coverage cannot be unilaterally terminated. Distribution procedure: our reports are distributed first to our web-based subscribers on the date shown on this report then made available to delayed access users through various other channels for a limited time. The distribution of FRC’s ratings are as follows: BUY (68%), HOLD (8%), SELL (5%), SUSPEND (19%). To subscribe for real-time access to research, visit http://www.researchfrc.com/subscribe.php for subscription options. This report contains "forward looking" statements. Forward-looking statements regarding the Company and/or stock’s performance inherently involve risks and uncertainties that could cause actual results to differ from such forward-looking statements. Factors that would cause or contribute to such differences include, but are not limited to, continued acceptance of the Company's products/services in the marketplace; acceptance in the marketplace of the Company's new product lines/services; competitive factors; new product/service introductions by others; technological changes; dependence on suppliers; systematic market risks and other risks discussed in the Company's periodic report filings, including interim reports, annual reports, and annual information forms filed with the various securities regulators. By making these forward looking statements, Fundamental Research Corp. and the analyst/author of this report undertakes no obligation to update these statements for revisions or changes after the date of this report. A report initiating coverage will most often be updated quarterly while a report issuing a rating may have no further or less frequent updates because the subject company is likely to be in earlier stages where nothing material may occur quarter to quarter. Fundamental Research Corp DOES NOT MAKE ANY WARRANTIES, EXPRESSED OR IMPLIED, AS TO RESULTS TO BE OBTAINED FROM USING THIS INFORMATION AND MAKES NO EXPRESS OR IMPLIED WARRANTIES OR FITNESS FOR A PARTICULAR USE. ANYONE USING THIS REPORT ASSUMES FULL RESPONSIBILITY FOR WHATEVER RESULTS THEY OBTAIN FROM WHATEVER USE THE INFORMATION WAS PUT TO. ALWAYS TALK TO YOUR FINANCIAL ADVISOR BEFORE YOU INVEST. WHETHER A STOCK SHOULD BE INCLUDED IN A PORTFOLIO DEPENDS ON ONE’S RISK TOLERANCE, OBJECTIVES, SITUATION, RETURN ON OTHER ASSETS, ETC. ONLY YOUR INVESTMENT ADVISOR WHO KNOWS YOUR UNIQUE CIRCUMSTANCES CAN MAKE A PROPER RECOMMENDATION AS TO THE MERIT OF ANY PARTICULAR SECURITY FOR INCLUSION IN YOUR PORTFOLIO. This REPORT is solely for informative purposes and is not a solicitation or an offer to buy or sell any security. It is not intended as being a complete description of the company, industry, securities or developments referred to in the material. Any forecasts contained in this report were independently prepared unless otherwise stated, and HAVE NOT BEEN endorsed by the Management of the company which is the subject of this report. Additional information is available upon request. THIS REPORT IS COPYRIGHT. YOU MAY NOT REDISTRIBUTE THIS REPORT WITHOUT OUR PERMISSION. Please give proper credit, including citing Fundamental Research Corp and/or the analyst, when quoting information from this report. 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Transcript of Georox Resources Inc. (TSXV: GXR / FRANKFURT: OF6A ... · The company’s projects currently...