Exploration Aurtois Inc. EXTSF

Natural Gas Outlook Positive

[Tokato]

I believe the entire junior oil and gas sector is poised for a major recovery and turnaround. Given the substantially depressed valuations, such a recovery could result in share price gains of between 50% and 100% in a year - yet such gains would still not be at new 52-week highs for most names. I mean look at the big caps (CNQ, ECA and TLM) - they are at 52-week highs and have made a huge surge. That's because the market has responded to a major (and likely sustained move) in oil prices from the low 50's to the low 60's. Also, natural gas has moved up significantly. The average Henry Hub price in Q4/2006 was $6.04/mmbtu. In Q1/2007 it was $6.39 - up 6% (a slight, but meaningful improvement). Today it is just under $8.00/mmbtu - that's a 25% increase quarter-over-quarter. The EIA predicts that summer (April-September) gas prices will average $7.64/mmbtu - up 18% from the same period last year. Remember, given that operating costs are mostly fixed (service costs will vary with relative strength in commodity prices, but it is more fixed than variable) changes in prices (and thus revenue) will have a greater change in cash flow. so expect substantial improvements in year-over-year cash flows across the sector in general in Q2 and Q3. As importantly, it isn't just an improved commodity price outlook that we have to look forward to. Many juniors had disappointing production profiles in 2006. For some unexplained reason it seemed that production shortfalls were more rampant last year for juniors than in any other year in recent memory. 2006 was just "bad karma", I guess. That said, many juniors with "disapponting" results in 2006 were not all in vain. Some have built up a lot of knowledge from last year's activity and the less noticeable exploration successes often lead to substantial development locations to be exploited in 2007. For EXA, 2006 was a year of disappointment - no question. But it appears 2007 will turn out to be the year of redemption. Production has steadily increased and they are getting better at finding significant new pools (like its announcement of two large Wabumum pools). It has already made huge infrastructure investments in 2006 and will more-or-less concentrade on drilling and completions in 2007. I predict its success rate will be far higher in 2007. EXA has established conservative guidance. I expect 2007 will see the company exit at 3,800 BOEs/d - possibly even 4,000 BOEs/d. At these production rates (it is already at 3,200 BOEs/d with some 300+ BOEs/d behind pipe), the companyis massively undervalued at around 40,000 BOEs/d (vs. industry at around $50,000-$60,000 BOEs/d). EXA should be a $4.00 stock today! This is especially the case given its substantial portfolio of high IRR projects.