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MAKALU INTERNATIONAL EQUITY FUND Profile on a current long holding (as of October 29, 2018)

Renaissance Oil Corporation Building a World Class Oil Company in Mexico

Market Cap: US$ 40 million Stock Price (10/2/18): C$ 0.21 Target Price: C$ 2.00 Note: Unless otherwise indicated, all dollar amounts are in US Dollars.

About the Company Renaissance Oil (ROE CN) is a Mexico-focused oil and gas company that is developing a prolific block in the Tampico-Misantla onshore basin. The Upper Jurassic shale formations in the Tampico-Misantla basin are the major source rocks for the world’s largest producing offshore oil field (Cantarell, with peak production of 2.1 million barrels a day), and the world’s most prolific oil well ever found (Cerro Azul-4; produced at a peak of 260,000 barrels a day). Renaissance Oil is using the latest technology to prove up and develop the Upper Jurassic shales in the company’s 60,000 acre Amatitlan block in the heart of Tampico-Misanlta basin.

Our Thesis Geology is destiny in early stage oil companies. And geology does not come much better than the Tampico-Misantla basin, one of the top remaining onshore Super Basins in the world. This basin has characteristics similar to the Eagle Ford basin in the US, but is three times thicker, making the economics of hydrocarbon production that much more attractive. Great geology attracts the best talent, and Renaissance Oil has secured the services of the technical team from the old Mitchell Energy that was responsible for starting up the shale revolution in the USA: a shale Dream Team. The main concerns of the market are regarding Mexican politics, but we believe these risks are overblown. As a first mover in the shale industry in Mexico, Renaissance Oil has an under-appreciated advantage, akin to what Petrohawk Energy accomplished in the Eagle Ford basin. We believe that Renaissance Oil is the premier junior oil company in Mexico and is set to become a very large company in the medium term.

Introduction In this report, we focus only on the Amatitlan block operated by Renaissance Oil. While the company operates various blocks in other parts of Mexico, most of the future value of Renaissance will originate from the Tampico-Misantla basin; hence our focus here on this block.

Mexico has easily one of the largest undeveloped oil and gas resources in the world. The Mexican National Hydrocarbons Commission (CNIH) claims that Mexico has a total estimated 112 billion barrels of oil equivalent resources, which would make it one of the largest in the world.

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Despite such formidable resources, oil production in Mexico has been falling relentlessly from 2.6 million barrels/day of oil in 2009 to 1.9 million barrels/day of oil in 2018.

Because of the monopoly held over the last 76 years by the state-owned oil corporation, Pemex (Petroleos Mexicanos), Mexico’s resources have been poorly exploited. The USA has an estimated 1.7 million active oil and gas wells, an amount that stands in stark comparison to the mere 8,000 producing wells in Mexico. One way to visualize this is to look at the map of oil and gas wells in the Gulf of Mexico. Geology does not respect national boundaries; yet the international border is very clear when you look at this map.

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In addition, Pemex spent most of its efforts in offshore operations. Because of the success of the enormous Cantarell offshore oil field, and the fact that the Mexican state heavily taxed Pemex, leaving little for the company, onshore hydrocarbon development in Mexico became an orphan asset. This is where we believe opportunities lie. The onshore, unconventional resources in Mexico are spread across four onshore basins: Tampico-Misantla (Tampico from now on), Nuevo Leon, Sabinas and Veracruz. Please see the map below.

The best prospects lie in the Tampico basin. IHS Markit, a London-based research firm, identifies the Tampico as one of the top 24 global onshore “Super Basins”. They believe that the Tampico basin may well mirror the Permian basin in the US. In 2000, the estimated ultimate recoverable resources (EUR) of the Permian was 35 billion barrels of oil. Today, the EUR at the Permian is 104 billion barrels and it is the fastest growing basin in terms of oil production in the world. Mexico’s oil authorities estimate that the Tampico basin currently has 35 billion oil equivalent prospective unconventional (shale) resources.

Geologically speaking, the Eagle Ford basin in the US is the closest to the Tampico basin, except that the latter is three times thicker than the former. [Please refer to the table below.]

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Before we dig much deeper into the geology of the Tampico basin, we want to focus on the management team at Renaissance Oil. Great geology attracts the best talent and this company is an excellent example of that.

Management Renaissance Oil has assembled what can easily be described as the Dream Team when it comes to shale oil exploration. The company has reassembled the core of the old Mitchell Energy shale technical team. Mitchell Energy was the company that started the shale revolution in the US by first commercializing the Barnett shale in Texas, establishing a large land position early on the cheap and eventually selling to Devon Energy for $3.5 billion. We believe that Renaissance’s Dream Team is far more valuable than most investors realize.

For example, Pemex drilled several wells right through the Amatitlan block’s shale deposits without appreciating the value of the thick shales. Renaissance’s technical team studied these well logs, cuttings and cores of the shale rock itself and data from wells across the Tampico basin. With this evidence in hand, the Dream Team is convinced that these shales have the same characteristics and all the productive potential of the prolific Eagle Ford. Given the superior thickness of Upper Jurassic shales, perhaps the Tampico basin holds even more potential than the Eagle Ford.

Producing from shale deposits is a relatively recent innovation and has only been implemented on a large scale in the US and Canada, but little has been done in Mexico. With the evaluation of Tampico’s shales in hand, in 2017 Renaissance entered into a joint venture with global giant LUKOIL joining Pemex in the development of the Amatitlan block. Renaissance took over operatorship on the block and started the initial drilling program in 2018. To date, 17 wells have been drilled into the shallower “non-shale” oil formations at Amatitlan, restoring oil production to the block that was previously dormant. In August, the final well of the 2018 drilling program was spud to target the deep Upper Jurassic Shales with the intention of proving up the Upper Jurassic shales production potential.

Renaissance Oil was started by Ian Telfer and Craig Steinke. As founder and now chairman of Goldcorp, Telfer commands tremendous respect in corporate Canada, and has an unmatched ability to raise funds. Goldcorp grew from a small-cap company by acquiring and developing gold mines in Mexico. It now operates three of the biggest gold mines in Mexico, investing billions of dollars in the country. Telfer and Steinke previously started an oil company called Realm Energy. Realm Energy listed at 10 cents in October 2009, acquired shale properties across Europe and was bought out at $1.30 just over two years later. We expect Telfer’s role to be critical for Renaissance Oil, as his formidable skills at raising capital will be required.

Another important board member is Eskandar Maleki. He has a large following given that he was an early strategic investor in Tullow Oil when it had a mere $30 million market cap, and at one point was the largest investor in Tullow. Tullow Oil eventually peaked at $20 billion market cap. Like Telfer, his capital raising abilities may play an important role in Renaissance’s future.

Dan Jarvie is Renaissance’s Chief Geochemist. He previously held a similar position at EOG Resources, the largest shale oil producer in the US, and was responsible for the geochemical analysis of the Barnett shale for Mitchell Energy. Jarvie has done extensive and pioneering work on evaluating and mapping Mexico’s shale basins.

Nick Steinsberger is Renaissance’s Drilling Engineer. He is the originator of the shale revolution in the US when he was at Mitchell Energy. He engineered and implemented the slick water fracs in the Barnett shale, and designed the first horizontal completions at Devon Energy.

Dan Steward and Kent Bowker are Renaissance’s Senior Geologists. Both were leading members of Mitchell Energy’s Barnett shale team. They were both instrumental in evaluating the potential of the Barnett Shale and have decades of shale experience.

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Carol Law, the Chief Operating Officer, has 30 years of global experience in the oil industry, and was previously with Kerr McGee and BP/Amoco.

Kevin Smith, the Director for Business Development, brings 20 years of investment banking experience to the job. Previously, he was an advisor for Realm Energy’s transactions.

About The Tampico Basin’s Geology What makes the Tampico basin a “Super Basin” is that the Upper Jurassic shales have historically been very prolific as a source rock. The most abundant oil well in history, the Cerro Azul #4 well, which produced 260,000 barrels a day in 1916, encountered a formation sourced with oil from the Upper Jurassic shales. The world’s largest offshore oil field, the Cantarell oil field had the Upper Jurassic shales as its major source rock as well.

The Upper Jurassic is the exact source rock that is being targeted by Renaissance Oil. Renaissance believes Amatitlan is in the “sweet spot” of a shale resource fairway, with light oil as its primary target. This is an important conclusion for commercial productivity from a shale resource perspective. For the Eagle Ford shale, only 20% can be considered “sweet spots” and it is this zone that has delivered outsized returns for its investors.

Dan Jarvie, Renaissance Oil’s Chief Geochemist, has been evaluating the Tampico basin’s source rock for producibility. His work shows that the Upper Jurassic formation in the Amatitlan block is in the sweet spot of being in the volatile oil zone and the rich wet gas zone. He found that the Upper Jurassic formation in the block thickens from east to west and is continuous.

Jarvie used the quantitative aromatic hydrocarbon data to estimate the equivalent reflectivity in oil submersion (%Roe). There were two wells drilled in the vicinity of the Amatitlan block. The first was the Corrallilo-157 well (32 miles southeast of Amatitlan’s block) which came in at a %Roe of 0.88%. The second was the Zolta-2 well, which is only 13 miles southeast of Amatitlan, where the oil extracts came in at 0.9%. Both figures indicate that the Tampico basin around Amatitlan is in the perfect window for the volatile oil zone and the rich wet gas zone; ideal for generating shale oil and gas.

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In addition, the hydrogen index for these wells were also in the right range. For the Corralillio-157 well, it came in at 143 hydrogen index and generated 38 API oil. Jarvie estimates that Amatitlan has a hydrogen index of about 50 to 100, which would put it in the volatile oil zone with consequently even lighter oil. For comparison, in the best formation in the Eagle Ford formation, the %Roe was about 1.1% with a hydrogen index ranging from 70 to 120.

The targeting of the ideal fairway early in a shale play’s development is what made the Petrohawk Energy and EOG Resources, huge success stories in the Eagle Ford shale basin. The Eagle Ford shale runs northeast to southwest in Eastern Texas. The Eagle Ford has a dry gas window, the closer one is geographically to the Gulf of Mexico. At the northern fringes of the Eagle Ford, the oil becomes too heavy for optimal shale producibility. Roughly in the middle is where the volatile oil and rich wet gas zones are, creating the largest production rates and therefore the best economics; and this is where EOG drilled so successfully.

There is a lot to be said for being an early mover for a new shale play. Petrohawk Energy was the pioneer in oil production from the Eagle Ford shale, primarily because it was the first mover in leasing the best pieces of land at very low costs. But before the Eagle Ford was the hottest new shale play, in 2007 the executives of Petrohawk were secretly securing large leases in South Texas that previously held little value for oil and gas exploration. Initial lease prices paid by Petrohawk in the Eagle Ford were as low as $150 per acre. Five years later majors like Devon were buying Eagle Ford acreage for $50,000 per acre. The Eagle Ford was a tremendous growth driver for Petrohawk and led to the company’s sale to Australian resource giant BHP for $12 billion in 2011. We expect Renaissance Oil to follow in the footsteps of Petrohawk.

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The Upper Jurassic shales, which comprise three distinct target zones, are estimated by Jarvie to have a net thickness of 311 meters in the Amatitlan block. For comparison, the 311 meters from the middle of the block is 3.3 times the thickness of the average for the Eagle Ford shale formation in Texas. Having such a thick shale does not necessarily increase initial oil production for each well; however, it does reduce the cost of drilling wells considerably, as multiple horizontal wells can be stacked on top of each other and drilled from the same pad, without cannibalizing oil production.

The Corralillo-157 well drilled by Pemex in 2013, 30 miles south east of Amatitlan, produced 38 API oil at an initial flow rate of 650 barrels of oil/day from the Upper Jurassic shales. That work also generated valuable data, including the same quantitative aromatic hydrocarbon data as used on source rock samples. This proved the productive capacity of the Upper Jurassic shales in Mexico and allowed Jarvie to calibrate estimates for the Amatitlan block. In addition, the hydrogen index contour map indicated that the block was in a favorable locale for volatile oil.

Jarvie’s work on modeling the geologic “burial and thermal history” also indicates that the Amatitlan block is in the right zip code. Jarvie estimates that the API of the oil should be over 40 degrees. The light oil should also have sufficient gas to provide good ‘push’ for the oil with about 50:50 oil:gas equivalent.

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The Hydrogen Contour Map for the Tampico Basin

Jarvie estimates that the Amatitlan block retains 6.6 billion barrels of oil equivalent. This is based on the following assumptions:

Thickness of shale deposits 650 feet Percent petroleum retained 30% Barrels per acre feet 564 barrels Acres 60,000

Assuming an 8% recovery factor, we end up with an estimated recoverable amount of 500 million barrels of oil equivalent. We estimate that these are very conservative figures.

Economics Of A Well In Production After accepting that Renaissance Oil is sitting on an excellent geological endowment, the next question is how profitable will it be?

In the table below, we show an analysis of what we expect the netbacks for the company to be, once it migrates to a license contract for the Amatitlan block. Note that on June 22, 2018 the Board of Directors of Pemex approved the migration of the Amatilan block to a license contract. Approval to a Joint Operating Agreement is now being sought from the government and we estimate that the announcement of the final contract terms will come in the beginning of 2019.

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Renaissance Oil Netback Analysis

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These are netbacks/barrel; an operating metric. They do not account for capital costs incurred to drill and equip the wells. That would be seen by payback period as a first approximation, and net asset value as the longer-term metric. At $80 Brent and $2.75 natural gas prices, we estimate a nine-month payback period. This assumes a $12 million well cost. Over time, this cost should go down to much lower levels. At $8 million well cost, we estimate a six-month payback period. All of these are excellent paybacks.

To calculate the net present value per well drilled, we assume a 6% a year discount rate (or 0.5% a month), decline rate of 6% a month for the first year (followed by lower decline rates after the first year). That works out to a recycle ratio of about 2.8x. But this is highly sensitive to well costs, decline rates and oil prices. At a 6% decline rate a month for the first year (slower after that), $80 oil prices, and $10 million well costs, we get a recycle ratio of 3.5x.

Sustainable Cash Flow Renaissance Oil will initially need a lot of capital to get the first several wells started up. Once enough of these wells are producing, the company will be able to generate sufficient cash flow, so that it will become self-financing.

The question is how long it will take to get there.

Renaissance Oil expects to drill four gross wells in 2019 and 12 gross wells in 2020. If we assume $12 million to drill a well, that would indicate a total project cost of $48 million; since the company is assumed to be a 50% owner of the block, it would cost $24 million net to Renaissance Oil to drill the wells. The gross operating cash flow works out to be $13 million in 2019 to offset some of the capital needs.

In 2020, the Joint Venture would need $144 million to drill 12 wells. That would generate $129 million in operating cash flow, out of which $20 million will be paid out in estimated taxes. Therefore, in 2020, the company’s share of free cash flow could be negative $22 million.

By 2021, we expect the project to be free cash flow positive and therefore able to self-finance all remaining capital expenditures.

Our discounted cash flow valuation suggests a fair value well north of C$4. However, because of significant uncertainties regarding future oil prices, we stick to the more conservative target based off asset valuation, rather than cash flow valuations.

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An Asset Based Valuation: Land Value Assessment of Renaissance Oil Next, we carry out a valuation of Renaissance Oil using the value of their oil resources. ROE current working interest 25%

Pemex assumed working interest 20%

ROE eventual working interest 50%

Total Acreage 60,000 acres

Estimated unconventional resources equivalent 6,500 million barrel

Estimated recovery factor 8%

Estimated recoverable unconventional resources 520 million barrels equivalent

Estimated recoverable unconventional resources net to ROE 260 million barrels equivalent

Assumed value of a barrel of oil of resources US$10

Estimated eventual value of ROE US$2,600 million

Assumed dilution 100%

Value of ROE to current shareholders $1,300 million

Current Risk Factor 80%

Value to current shareholders $260 million

Current ownership of block at 25% implied value $130 million

Current value per basic share C$0.48/ share

Un-risked value per basic share C$2.34/ share

As the well results come in, and the geology is proven up, the current risk factor will fall considerably and value will increase to Renaissance Oil shareholders.

Once the contract migration occurs, the value of the block net to the company will go up as it will go from 25% of the current service contract, to a 50% working interest in a license contract. In that event, the share price should react favorably, particularly after the capital has been raised to buy the block based on right of first refusal. At $10 a barrel, we get a fair value of C$2.34. At $8 a barrel, we get $1.87. We assume that $2 is a full price for this company’s shares.

Do note that we are being very conservative in our projections. By our estimates, Renaissance Oil’s block will be generating 30,000 barrels of oil equivalent/day in a few years. At a $27/boe margin, that works out to $300 million in profits, with half going to Renaissance. Putting a multiple of 10 times on it, would impute a value of $1.5 billion to Renaissance; which in turn works out to $3 a share fully diluted.

Prospects For Growth Renaissance Oil has blocks surrounding it with similar shale potential. However, as mentioned earlier, shale oil production is a recent innovation and has not been instituted on any scale in Mexico. We expect that the operators of blocks surrounding Amatitlan will soon come to the realization that they do not have the technical skills needed to deliver on their block’s shale potential. We expect them to eventually partner up with Renaissance Oil by selling part of their block to Renaissance Oil (at favorable terms to the company), in exchange for Renaissance Oil’s unconventional development know-how.

For example, a 60,000 acre block directly to the northwest of Renaissance Oil has already been offered to Renaissance with a right of first refusal. We believe this block is in the sweet zone and expect Renaissance to exercise its right of first refusal.

In addition, we have assumed that only the Pimienta part of the Upper Jurassic shales are economic. If the Taman and Santiago formations also prove to be economic, then Renaissance Oil could easily double the number of oil wells in their Amatitlan block, making it ever more lucrative.

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Challenges Sell side analysts highlight two concerns. First, the Amatitlan block is currently on a service contract, and analysts say that there is a risk that the contract won’t migrate to a more lucrative license contract. Second, Renaissance Oil has to validate the geology by drilling a proof of concept well in its block.

We don’t share these concerns. We expect that the contract migration will be finalized and that the shale well that is currently being drilled on the block will affirm the current geological thesis that has been built upon analysis of historical drilling data.

We see two issues that can pose a challenge.

First, Renaissance Oil will need an estimated $20 million to exercise a right of first refusal for getting to 50% of ownership of Amatitlan. With a current market cap of $45 million, that is a challenge. The company’s exclusive options to increase its ownership in the block are post-migration to a license contract and after the results will be known from the important shale well now drilling. However, once the contract migration and shale well results are known, all of the key risks would be mitigated. Therefore, Renaissance Oil can exercise its options, allowing for a significant rally in the company’s share price.

After the company acquires 50% of the block, the joint venture is expecting to drill four gross wells in 2019 and 12 gross wells in 2020. That suggests a cash burn of over $20 million in 2019 and 2020 each, net to Renaissance Oil. However, this is yet another cash call on the company’s investors.

The second challenge is the fact that Renaissance Oil operates in Mexico, where the monopoly of Pemex has only recently been taken away. Even after the service contract is migrated to a license contract for the block, Renaissance Oil will need to secure all manner of permits and work with Pemex on developing the block. Given the inherent bureaucracy of a large company like Pemex, it is possible that Renaissance Oil may see significant delays to its operations. For example, the company chose to re-enter an existing vertical wellbore, Profeta-1, rather than drill a brand new shale well, because of a more expedient permitting process for re-entering an existing well. While not an existential risk, such an outcome would be detrimental to ROE achieving its full potential.

One possibility that Renaissance Oil may explore, is to partner up with a local Mexican business group. Mexicans are fully aware of the oil potential of their country, but given the decades old monopoly of Pemex, big business in Mexico does not possess the know-how to operate in the most promising industry in their own country. It would make sense for such business groups to partner up with companies like Renaissance Oil. Something similar had happened after the mining industry was opened up to the private sector in Mexico in the 1970s, and there is no reason why that pattern won’t repeat itself in the oil industry.

Conclusion Renaissance Oil provides an excellent opportunity to invest in a newly deregulated oil industry in a very promising geography: Mexico. With its dream team, an excellent asset, first mover advantage and the potential to scale this business considerably, it is hard to find a better investment in the oil and gas industry anywhere in the world at an early stage, and at enormous discounts to true value. As the example of Petrohawk Energy in the Eagle Ford shows, being the first mover in a new basin provides tremendous knowledge and access to the best blocks. We are huge fans of Renaissance Oil and we expect to be owners of Renaissance Oil for a very long time to come.

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Renaissance Oil Corporation

Founded 2013/Listed 2014

Toronto Venture Exchange

Vancouver, Canada

GICS Classification: Energy/Energy/Oil, Gas & Consumable Fuels/Oil & Gas Exploration and Production

Auditor: Deloitte, LLP

Financial Statements (last 12 months)

Income Statement: Net loss of $6 million

Balance Sheet: Net cash of $7 million

Cash flow: Cash burn of $2 million in last 12 months

Renaissance Oil in the Makalu Scoring System Since Renaissance is not a fully operating company, the Makalu scoring system won’t work for now. We estimate what the Makalu score would be for Renaissance Oil once it starts drilling its first well under the new License Contract.

Quality of Business 6/10 Earnings Volatility 5/10 Upside to Price Target 10/10 Profitability 10/10 Asset Growth 10/10 Price Momentum n/a Earnings Momentum 10/10

ROE CN STOCK PRICE FROM 2014 – Q3 2018

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