BEACH ENERGY LIMITED — M&A Activity 2009

Jun 16, 2009

Level 8 l 16 Spring Street l Sydney NSW 2000 P l +61 2 9241 4440 F l +61 2 9241 4404 E l admin@drillsearch.com.au W l www.drillsearch.com.au

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16 June 2009

Dear Shareholder,

REJECT THE INADEQUATE AND OPPORTUNISTIC TAKEOVER BID FROM BEACH PETROLEUM

As announced on 5 May 2009, Drillsearch Energy Limited (“ Drillsearch ” or the “ Company ”) received a highly conditional off-market takeover bid (“ Offer ”) from Beach Petroleum Limited (“ Beach ”) for all of the issued shares in Drillsearch.

Beach is offering you one (1) Beach share for every 27 of your Drillsearch shares. Based upon Beach’s share price of 86.0 cents at market close on 16 June 2009, this represents an implied value of 3.2 cents per Drillsearch share.

The Board of Drillsearch has carefully considered the Offer and is unanimous in recommending that shareholders REJECT THE INADEQUATE AND OPPORTUNISTIC OFFER from Beach.

To reject the Beach Offer, YOU DO NOT NEED TO TAKE ANY ACTION .

The Board of Drillsearch will provide its detailed reasons for rejecting the Offer, including its formal recommendations, in its Target’s Statement to be mailed to shareholders shortly. A list of key reasons to reject the Offer is attached to this announcement in Annexure A. A summary of these key reasons is outlined below:

1. The implied value of the Offer is inadequate and significantly undervalues Drillsearch and its future potential;

2. The implied value of the Offer fails to recognise the strategic value of Drillsearch to Beach; 3. The implied share price premiums claimed by Beach are calculated near market low points and exclude the impact of recent favourable announcements ;

3. Beach’s takeover attempt is opportunistic , being timed near the recent low point in the resources cycle, with no recognition of the expected positive long term benefits for Drillsearch from any global economic recovery or from recent oil price appreciation;

4. The Board is united and is fully supportive of Drillsearch’s new Managing Director Mr. Brad Lingo, who joins the Company with more than 25 years of oil & gas experience;

5. Drillsearch’s long term potential is favourable, with an extensive portfolio of assets from which to generate shareholder value, cash holdings of $7.8 million as at 31 March 2009 and importantly no debt;

6. Beach’s Offer is subject to terms that are highly conditional and uncertain , and will fail on its present terms unless Beach waives a key condition of the Offer that cannot be satisfied; and

7. There are question marks over Beach that may impact the future value of its shares.

ABN l 73 006 474 844

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Drillsearch shareholders will likely have already received Beach’s Bidder’s Statement. To reject the Beach Offer:

• DO NOT send back the Acceptance Form accompanying the Beach Bidder’s Statement; and

• DO NOT tell your broker to accept the Offer.

Yours sincerely,

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Jim McKerlie Chairman

For further information please contact:

Drillsearch

Phone (02) 9241 4440 Brad Lingo

TC Corporate

Phone (02) 9377 1555 Robert Fraser Keir Semmens Richard Amland

Deacons

Phone (02) 9330 8000 James Stewart Shaun Clyne

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ANNEXURE A: KEY REASONS TO REJECT THE BEACH OFFER

1. THE IMPLIED VALUE OF THE OFFER IS INADEQUATE

• The Board is united in its belief that the Offer SIGNIFICANTLY UNDERVALUES Drillsearch and its future potential. As a result of Drillsearch’s technical efforts and information provided by Beach Petroleum in its capacity as operator on multiple joint venture sites with Drillsearch, the Board has increased confidence that the current aggregate of proven reserves, contingent resources and prospective resources is materially greater than the reserve positions presented in Drillsearch’s 2008 annual report.

Drillsearch Reserves at 31 December 2007

Drillsearch Reserve & Resource Additions since 2008 Annual Report

1P + 2P (developed and undeveloped) Oil mmboe Total 2P Australia 1.5 Total 2PCanada 0.4 2P Group Total 1.9 3P (developed + undeveloped) Oil mmboe Total3P Australia 4.0 3PGroupTotal 4.0	Mean Gross Recoverable Sales Gas and Prospective Resources
	PEL 106 (Beach Farmin) and Udacha Gas Discovery BCF
	Sales Gas 9.2 Prospective Resources 3.3
	Unrisked Mean Potential Recoverable Reserves Oil mmbbl
	PEL91 4.4

Source: Beach Petroleum replacement Bidder’s Statement

Source: Drillsearch Energy Limited 2008 Annual Report

• The Offer fails to recognise the value of the strategic and development potential of Drillsearch’s assets in the Cooper Basin. Beach is aware of this strategic value. In its capacity as a joint venture partner with Drillsearch, Beach is in possession of material information regarding significant and material proven reserves, contingent resources and prospective resources in Drillsearch petroleum licence areas PEL 91, PEL 106 and PEL 107.

• The map on the next page is sourced from a Beach presentation to investors in April 2009 and highlights Beach’s interest in the “New Oil Fairway” in the Cooper Basin region.

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Source: Presentation by Beach at the Lodge Institutional Stockbroking Presentation dated 2 April 2009

• Beach has repeatedly made announcements with regard to its successes in its own Cooper Basin tenements, particularly PEL 92 which adjoins Drillsearch’s PEL 91, PEL 106 and PEL 107 tenements. Specifically, Beach announced on 1 April 2009 that “Oil exploration drilling within PEL 92 to date has been particularly successful. Since the commencement of operations by the Beach operated joint venture in 2002, 12 exploration wells have been drilled at a 50% success rate resulting in the discovery of more than 8 million barrels of recoverable oil.” Beach describes PEL 92 as “High Profit Oil.”

• As operator of PEL 91 (Drillsearch 60%), Beach considers PEL 91 to sit in the Western Flank Oil Fairway. Drillsearch is aware that Beach as the operator has identified more than 40 drilling prospects in PEL 91. The top seven of these oil prospects represent 7.3 mmbbls of unrisked mean potential recoverable oil and Beach considers them to be potentially economically viable drilling prospects. The best two prospects are programmed for drilling in September/October 2009.

Disclosure of PEL 91 Potential Reserves

Disclosure of PEL 91 Potential Reserves	Disclosure of PEL 91 Potential Reserves	Disclosure of PEL 91 Potential Reserves
Prospect Totalunrisked mean potential recoverable reserves (oil) Totalrisked mean potential recoverable reserves (oil)
91-45 and 91-48 prospects	3.5mmbbl	1.2mmbbl
5 additional prospects	3.8mmbbl	0.8mmbbl
Top 7 prospects (total)	7.3mmbbl	2.0mmbbl

Source: Beach Petroleum replacement Bidder’s Statement Note: Beach Petroleum replacement Bidder’s Statement erroneously refers to PEL 91-12; the correct reference is PEL 91-45 as indicated above

• Beach is also acquainted with the significant gas potential in PEL 106 (Drillsearch 100%, Beach is still earning its 50% interest in the Beach Farmin Area of PEL 106) due to its role as the operator of a very prospective part of PEL 106. In the Beach Farmin Area of PEL 106, Beach has drilled four wells resulting in the discovery of

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three gas fields with mean gross recoverable sales gas of 14.6 BCF in total and 28.8 BCF on a P10* basis. Beach has also assessed the Udacha gas-condensate field (Drillsearch 32.5%), which sits on the boundary of PEL 91 and PEL 106, to contain mean recoverable sales gas reserves of approximately 4.9 BCF. Beach has also identified one additional prospect in the Beach Farmin Area with mean potential reserves of 6.5 BCF that, if successful, will enhance the attractiveness of developing the PEL 106 fields.

Disclosure of PEL 106 and Udacha Potential Reserves

	Gross Recoverable Sales Gas (BCF)	Gross Recoverable Sales Gas (BCF)
Field / Prospect	Mean	P10*
Middleton	5.0	9.6
Brownlow	5.9	12.6
Canunda	3.7	6.6
1 other prospect	6.5	n.a.
Udacha (PEL 91 & PEL 106)	4.9	8.8
Total	26.0	37.6

Source: Beach Petroleum replacement Bidder’s Statement; n.a. not available; * P10 means there is a 10% confidence that this reserve level will be met or exceeded

• Drillsearch had cash holdings of $7.8 million as at 31 March 2009, proven oil and gas reserves, positive cash flow from operations, promising exploration and development opportunities and importantly no debt.

• The Offer implies an acquisition price of US$11.1/bbl on an EV/2P basis compared with the global average transaction price of US$15.7/bbl over the last 3 years.

• At least one analyst believes that the implied Offer price is less than their preliminary valuation of Drillsearch and the acquisition would therefore be value accretive to Beach.

2. THE IMPLIED VALUE OF THE OFFER FAILS TO RECOGNISE THE STRATEGIC VALUE OF DRILLSEARCH TO BEACH

• Beach could be expected to derive strong synergies from a takeover of Drillsearch. In its Bidder’s Statement, Beach acknowledges it believes that:

• “the combined group would have potential for creating additional value and future savings through synergies. Beach and Drillsearch are already joint venture partners in 5 of Drillsearch’s 11 tenement interests;” and

• the consolidation of ownership interests held jointly by Beach and Drillsearch would “deliver greater efficiencies.”

• A number of analysts concur with Drillsearch’s view that:

  • (i) the acquisition presents an obvious strategic fit with Beach’s existing operations; and

  • (ii) Drillsearch’s assets (particularly Tintaburra, Naccowlah, and PEL 106 in the Cooper Basin), will roll into BPT’s portfolio easily with little to no extra costs or time associated.

• The Board believes that Drillsearch has a special value to Beach. However, the potential operational and financial synergies available to the combined group are neither quantified by Beach nor recognised in the implied value of the Offer.

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3. THE IMPLIED SHARE PRICE VALUE PREMIUMS CLAIMED BY BEACH ARE CALCULATED NEAR MARKET LOW POINTS AND EXCLUDE THE IMPACT OF RECENT FAVOURABLE ANNOUNCEMENTS

• The one and three month share price periods used by Beach do not include the Company’s announcements regarding the appointment of the new Managing Director, the strategic review being implemented or most importantly, the material information known to Beach about Drillsearch that was not included in the original version of its Bidder’s Statement.

• It is potentially misleading to base the Offer price premiums on trading data from February 2009 to April 2009, given the substantially more favourable equity market conditions which currently prevail. The S&P/ASX 300 Energy Index has appreciated by 29% in the four month period since 16 February 2009.

• Beach shares traded as low as 72 cents on 27 April 2009, just eight days prior to its Offer. At 72 cents per Beach share, Beach’s Offer would have an implied value of just 2.7 cents per Drillsearch share.

4. BEACH’S TAKEOVER ATTEMPT IS OPPORTUNISTIC

• The Offer is timed near the recent low point in the resources cycle, with no recognition of the expected positive long term benefits for Drillsearch from any global economic recovery and the consequent commodity price increases that should accompany a boost in demand for energy.

• The Offer follows recent low oil prices with no recognition of current oil price appreciation. The spot price for Malaysian Tapis Blend, which traded below US$40 per barrel in early 2009, traded at US$68.40 per barrel on 2 June 2009. This represents an increase of more than 40% (based on a US$48.81 price at 5 May 2009) since Beach announced its Offer on 5 May 2009.

• On 7 April 2009 as the operator of PEL 91, Beach presented to Drillsearch its full interpretation of the oil prospectivity of PEL 91 within the Western Flank Oil Fairway and a recommendation for the exploration wells to be drilled. Before Drillsearch could even approve the exploration commitment for these two wells in PEL 91, Beach launched its takeover offer for Drillsearch.

• Following action by Drillsearch, Beach submitted a revised replacement Bidder’s Statement which included new information that is materially favourable to Drillsearch shareholders. Drillsearch also believes that Beach is in possession of additional information in relation to PELs 91, 106 and 107 that has not been included in the replacement Bidder’s Statement. Beach’s attempt to acquire Drillsearch without providing such information is opportunistic.

• In the one week period leading up to the announcement of the Offer, Beach Shares appreciated 11%, highlighting the opportunistic nature of its all scrip Offer to take advantage of its recent pricing.

• A number of analysts concur with Drillsearch’s view that Beach’s timing would look to be opportunistic and that the Offer is an opportunistic acquisition for Beach.

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5. THE BOARD IS UNITED AND IS FULLY SUPPORTIVE OF DRILLSEARCH’S NEW MANAGING DIRECTOR MR. BRAD LINGO AND UNANIMOUS IN RECOMMENDING THAT THE OFFER BE REJECTED

• The Drillsearch Board is united following the recent Drillsearch shareholders’ meeting and is working effectively with management in building a strong future for the Company.

• The board is fully supportive of Drillsearch’s new Managing Director, Mr. Brad Lingo who took up duties on 15 June 2009.

• Mr. Lingo has more than 25 years of oil & gas experience ranging from frontier deepwater exploration offshore West Africa to commercialisation of major gas projects in Australia. His previous position was Senior Vice President and Head of Oil & Gas for the Commonwealth Bank of Australia, which he helped build into Australia’s leading oil & gas lender and a major regional oil & gas bank.

• Mr Lingo and the management team are undertaking a thorough strategic and business review of Drillsearch and its operations to identify the strategic value and growth potential of the Company. A presentation summarising the Company’s strategic overview accompanies this letter to shareholders and will be lodged with ASX.

• The Drillsearch Board is unanimous in recommending that shareholders reject the inadequate and opportunistic offer from Beach.

6. DRILLSEARCH’S LONG TERM POTENTIAL IS FAVOURABLE

• Drillsearch has an extensive portfolio of assets from which to generate shareholder value, including:

• a diverse exploration portfolio in what Beach describes as the strategic “Western Flank New Oil Fairway” in PEL 91;

• a strong pipeline of development projects forming the basis for the Company's gas commercialisation project in PEL 106;

• solid Cooper Basin oil production;

• cash holdings of $7.8 million as at 31 March 2009; and importantly

• no debt.

• Drillsearch has a clear strategy to develop its portfolio of oil and gas assets under the direction of the new Managing Director and the senior management team.

7. BEACH’S OFFER IS SUBJECT TO TERMS THAT ARE HIGHLY CONDITIONAL AND UNCERTAIN

• The Offer is subject to numerous conditions that extend over three pages at the back of the Bidder's Statement.

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• The Offer includes a condition that Beach secures a relevant interest in at least 90% of Drillsearch Shares.

• Shareholders should note that the Offer will FAIL on its present terms unless Beach waives a key condition of the Offer that cannot be satisfied. The proposed issue of options to Mr. Lingo announced to ASX on 18 May 2009 has triggered the “No Prescribed Occurrences” condition of Beach’s Offer and Beach has indicated it is reserving its rights regarding this condition.

• Shareholders should note that even if you accept the Offer for all of your Drillsearch shares, and all of the defeating conditions are not satisfied or waived by the end of the offer period, the contract that results from your acceptance of the Offer will be void upon the non-fulfilment of any of the conditions. Beach may at its discretion waive the conditions and enforce the contract as if the conditions had been fulfilled.

• Furthermore, if you accept the Offer, then during the Offer Period you will not be able to dispose of your Drillsearch shares to any other party (either on-market or off-market), even though the contract formed as a result of your acceptance may be void if a defeating condition is not satisfied or waived at the end of the Offer Period.

• Beach has not provided any downside protection to Drillsearch shareholders. The all scrip nature of the Offer means that should Beach’s share price fall, so too will the implied value of the Offer to Drillsearch shareholders.

8. THERE ARE QUESTION MARKS OVER BEACH THAT MAY IMPACT THE FUTURE VALUE OF ITS SHARES

• The potential value of the Basker/Manta/Gummy (“BMG”) project, in which Beach has a 30% interest, appears to have declined dramatically based on joint venture partner Roc Oil’s recent sale of a 10% stake in BMG.

• Beach and its joint venture partners in the BMG project are currently being sued in the Federal Court of Australia for US$90.1 million by BW Offshore following termination of contracts with that party. This could have a substantial impact on Beach should the participants be found liable for payment.

• Beach’s practice of hedging against commodity price fluctuations can generate significant earnings volatility. Beach reported in its FY2008 annual report net losses of $130 million in association with commodity hedging.

• Beach notes in its Bidder’s Statement that “If the CPRS (Carbon Pollution Reduction Scheme) is introduced in the form presently proposed by the Australian Federal Government, Beach may be exposed to additional operating costs which will have an adverse impact on its financial performance.”

• Beach claims that its management team has a “track record of success.” However, the fact is that during the two year period ended 12 June 2009 its share price has fallen by 41% compared with an increase of 10% in the S&P/ASX 300 Energy Index over the same period. Since inception of the S&P/ASX 300 Energy Index in March 2000 to 12 June 2009, Beach has underperformed that index by more than 50%.

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S&P/ASX 300 Energy Index and Beach Share Price Performance, 31 March 2000 – 12 June 2009 (rebased to 100)

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Beach Petroleum
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0.0
Mar-00 Dec-00 Sep-01 Jun-02 Mar-03 Dec-03 Sep-04 Jun-05 Mar-06 Dec-06 Sep-07 Jun-08 Mar-09
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• Beach says that it has a “history of regularly paying dividends.” However, every one of Beach’s dividends has been unfranked, which could expose capital that may otherwise be taxed at concessional rates to full marginal rates of tax. This may reduce the attractiveness of the Beach Offer to Drillsearch shareholders.

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