2012 Third Quarter Report

During the third quarter of 2012, the Company together with its partners continued to ramp up its exploration program in Kenya and Ethiopia in response to the successful Ngamia-1 oil discovery in Block 10BB (Kenya) and completed the second well of a two well exploration drilling program in Somalia (Puntland).

Following completion of the Ngamia-1 well, the Company and its partner Tullow moved the rig to drill the Twiga South-1 exploration well in Block 13T (Kenya) which is on trend with Ngamia-1. Twiga South-1 has successfully encountered oil, drilling is ongoing and an announcement of the well results is expected in late November after target depth has been achieved and necessary sampling and analysis has been completed. Upon completion of Twiga South-1 drilling, the rig will be utilized to conduct testing operations at Twiga South-1 and then move to test Ngamia-1.

With the discovery at Ngamia-1, two additional rigs were mobilized into the Company's areas of operation in Kenya and Ethiopia. The first additional rig has commenced drilling operations in Block 10A (Kenya) on the Paipai-1 exploration well which is scheduled to be completed around the end of 2012. This rig will then mobilize to Block 10BB (Kenya) to drill follow-up prospects in the Lokichar Sub-Basin where the Ngamia-1 and Twiga South-1 oil discoveries are located. The second additional rig is currently being mobilized in Ethiopia to drill Sabisa-1 which is our first exploration well on the South Omo Block, and is expected to spud around the end of 2012.

In addition, the Company has commenced planning to mobilize a rig to drill an operated exploration well on Block 9 (Kenya) commencing in mid-2013. The Company's partner, New Age, also plan on drilling an appraisal well on the El Kuran Oil Discovery in Ogaden Block 8 (Ethiopia) in mid-2013.

The Company will also continue to actively acquire, process and interpret 2D seismic over Blocks 10BA, 10BB, 12A, 13T and South Omo. In addition, 3D seismic acquisition is being planned over the Ngamia/Twiga structures in 2013.

In Puntland (Somalia), the Company, through its 44.6% ownership interest in Horn, completed Shabeel North-1, the second well of a two well exploration program. Both well sites have been restored to original condition and demobilization from Puntland has been completed. While the Company was disappointed that the first two exploration wells in Puntland did not flow oil, the Company remains highly encouraged that all of the critical elements exist for oil accumulations and based on this encouragement the Company and its partners have entered into the next exploration period in both the Dharoor Valley and Nugaal Valley PSC's which carry a commitment to drill one exploration well in each block.

KENYA

The Company and Tullow, its operating partner in each of the Kenyan blocks other than Block 9, are actively exploring for oil as described below.

Block 10BB

The Company and its operating partner on Block 10BB, Tullow, spudded the partnership's first well, Ngamia-1, in January 2012. The well encountered in excess of 100 meters of net oil pay in multiple reservoir zones over a gross interval of 650 meters of the Upper Lokhone Sandstone interval (855 meters to 1,500 meters). The reservoirs are composed of good quality Tertiary age sandstones. Moveable oil with an API greater than 30 degrees has been recovered to surface from four representative intervals. This oil has similar properties to the light waxy crude which has been discovered in Uganda by Tullow. After testing and evaluation of the Upper Lokhone pay zones, the well was drilled through the Lower Lokhone Sandstone interval and encountered an additional 43 meters of potential oil pay based on logs and the recovery of light oil on an MDT sample over a gross interval of 150 meters. The well was drilled to a total depth of 2,340 meters after penetrating the Lower Lokhone objective sequence. The well is now suspended for future flow testing. Testing equipment, including downhole pumps, is being mobilized and the intention is to flow test a number of prospective zones in the Upper and Lower Lokhone Sandstones to confirm the full potential of this discovery. Testing of Ngamia-1 will follow completion of operations on the Twiga South-1 well.

The positive results of the Ngamia-1 well have led the Company and its operating partner to accelerate the pace of exploration activities along the Ngamia-1 trend in Block 10BB and adjacent Block 13T. In 2012, the Company and its partner elected to accelerate an additional 1,783 kilometers of 2D seismic in Block 10BB which is approximately 50% complete. In 2013, the Company also plans to acquire 300 square kilometers of 3D seismic over the Ngamia structure and an additional 430 kilometers of 2D seismic to further delineate additional prospects and leads. A follow-up well on the Ngamia structure is also being planned for 2013 along with one or two additional wells within the block.

The drilling of the Ngamia-1 well satisfied the remaining work obligations of the initial exploration period under the Block 10BB PSC. The partnership elected to proceed into the next phase of exploration and have received formal government approval. The next exploration period which expires in July 2014 includes a commitment to drill one exploratory well and acquire 300 square kilometers of 3D seismic.

Block 13T

Following the Ngamia-1 discovery, the Company and its operating partner on Block 13T, Tullow, focused additional efforts to better delineate the prospects along the Ngamia-1 trend northward into Block 13T. Based upon the recently acquired 500 kilometers of 2D seismic data, at least six additional prospects similar to the Ngamia-1 discovery have been mapped in Block 13T, including the Company and its partner's next exploration well, Twiga South-1, which spud in August 2012. The Twiga South-1 well is planned to a total depth of 3,155 meters and targets the same structural trend and reservoirs as the recent Ngamia-1 oil discovery 23 kilometers to the south. Twiga South-1 has successfully encountered oil, drilling is ongoing and an announcement on the well results is expected late-November after target depth has been achieved and necessary sampling and analysis has been completed. Upon completion of Twiga South-1 operations, the rig will be utilized to conduct testing operations at Ngamia-1.

An additional 500 kilometers of 2D seismic, which has largely been acquired, in conjunction with the additional seismic acquisition in Block 10BB is aimed at maturing further leads into drillable prospects. In 2013, the Company plans to acquire 300 square kilometers of 3D seismic over the Twiga South-1 structure and an additional 90 kilometers of infill 2D seismic program.

With the completion of the original 500 kilometers of 2D seismic, the Company fully satisfied its work obligations for the initial exploration period under the Block 13T PSC. The partnership elected to proceed into the next phase of exploration and have received formal government approval. The next exploration period which expires in September 2014 includes a commitment to drill one exploratory well, which will be satisfied with the drilling of the Twiga South-1 well, and a commitment to acquire 200 square kilometers of 3D seismic.

Block 10A

The Company and its operating partners on Block 10A agreed on Paipai-1 as the location of the first exploratory well in Block 10A. The Paipai-1 well is planned to a total depth of 4,500 meters, and will test a large four-way closed structure with Cretaceous-age sandstone targets at multiple depths. Paipai-1 spudded in September 2012 and is scheduled to be completed early-2013. Paipai-1 will fully satisfy the required work obligations for the initial exploration period which was recently extended to April 2013. Following completion of Paipai-1, the rig will mobilize to Block 10BB (Kenya) to drill follow-up prospects in the Lokichar Sub-Basin in the area of the Ngamia-1 and Twiga South-1 oil discoveries.

Block 10BA

The Company and its operating partner on Block 10BA, Tullow, have completed approximately 40% of the planned 1,350 kilometer 2D seismic program in Block 10BA. The onshore portion of the survey has largely been completed and the offshore and near shore portions of the 2D program is planned to commence before year end. The 2D seismic program which is expected to be complete in the first quarter of 2013 will fulfill the work obligations of the initial exploration period under the Block 10BA PSC which expires in April 2013.

Block 12A

During the third quarter, the Company completed the farmout of 15% interest in Block 12A to Marathon Oil Corporation ("Marathon"), retaining a 20% interest in the block. Based upon the acquired FTG gravity survey, the Company and its operating partner on Block 12A, Tullow, have determined that the 500 kilometer 2D seismic acquisition obligation will be focused in the Kerio Valley in the southwestern portion of the block. The Block 12A program is scheduled to follow the completion of work in Blocks 10BB and 13T whose programs were expanded after the Ngamia-1 discovery. As a result, the Company and its partner obtained an extension of the initial exploration term to September 2013. The 500 kilometer 2D seismic program will satisfy the work obligations for the initial period under the Block 12A PSC and is expected to commence in first quarter of 2013.

Block 9

During the third quarter, the Company completed the farmout of 50% interest in Block 9 to Marathon. The Company retained a 50% interest in Block 9 and operatorship during the exploration phase. During 2011, a 750 kilometer 2D seismic program was completed. The new data was acquired over the Kaisut sub-basin in the northwestern portion of Block 9. Based upon the new data set, several large prospects have been mapped and resources have been estimated. The Company is currently planning to drill an exploratory well in mid-2013 that will satisfy the remaining exploration commitment for the second exploration period which expires in December 2013. The potential to drill a second well in 2013 is being evaluated.

ETHIOPIA

South Omo Block

The Company and its joint operating partners on the South Omo Block have completed a 1,002 kilometer 2D seismic program in the western portion of the South Omo Block. A number of interesting prospects and leads have been identified and some infill seismic data has already been acquired to mature leads into drillable prospects. The Company and its partners have selected Sabisa-1 as the first drilling location in the South Omo Block. Should this well be successful, there are a number of follow-on prospects that are drill ready. The Sabisa-1 well site has been prepared and the rig and associated equipment is in the process of being mobilized within country to the well site. Sabisa-1 is expected to spud around the end of 2012. The seismic acquired to date and drilling of Sabisa-1 will satisfy the remaining work obligations for the initial exploration period which expires in January 2013. Additionally, work has commenced on the acquisition of an additional 500 kilometers of 2D seismic in the eastern portion of the South Omo Block (Chew B'hir Sub-Basin).

Ogaden Blocks 7/8

The Company and its partners continue their focus on the El Kuran oil accumulation in Block 8, discovered in the early 1970's. After completing reservoir characterization studies, the Company focused efforts on testing and completion strategies for producing commercial quantities of oil and gas. In the second quarter, the Company received formal approval for a one year extension of the initial exploration period to July 2013. During the third quarter, the Company completed the farmout of 25% of its 55% working interest and operatorship to New Age. Planning for an appraisal well on the El Kuran oil accumulation in mid-2013 is ongoing.

Adigala Block

As part of work obligations for the second exploration period which expires July 2013, the Company and its partner incorporated newly acquired FTG gravity data with seismic data to improve the subsurface interpretation of the block. The Company also integrated results of recent surface geological studies and reprocessed data acquired in 2009 with the goal of improving the data quality.

Rift Valley Joint Study Block

The Company has completed the acquisition of high resolution gravity and magnetic data over the Rift Valley Block as part of a Joint Study Agreement with Ministry of Mines in Ethiopia. This block is on trend with highly prospective blocks in the Tertiary rift valley including the South Omo Block, and Kenyan Blocks 10BA, 10BB, 13T, and 12A. The Company has submitted an application to convert the Rift Valley Block to a formal production sharing contract.

PUNTLAND (SOMALIA)

Dharoor Valley and Nugaal Valley Blocks

In the first half of the year, the Company drilled the Shabeel-1 exploration well to a total depth of 3,470 meters before ending in metamorphic basement. The well encountered significant oil and gas shows in the Upper Cretaceous Jesomma Sandstones and Jurassic and Triassic sandstones deeper in the wellbore, but failed to encounter Lower Cretaceous sandstone reservoirs that were considered a primary objective. Petrophysical analysis indicated that potential hydrocarbon pay zones in the Jurassic and Triassic sandstones are thin and did not warrant further testing and the well was suspended pending further consideration of the Jesomma sandstone section.

Following results of the Shabeel-1 well, which provided evidence for a working petroleum system, the Sakson drilling rig was relocated 3.5 kilometers north of the Shabeel-1 well to test an adjacent structural trap, Shabeel North-1. The Shabeel North-1 exploration well was spud in June 2012 and encountered oil and gas shows in the Upper Cretaceous Jesomma sandstone section from 1,905 meters to 2,095 meters, similar to those encountered in the Shabeel-1 exploration well. An open-hole drill stem test was performed but failed to flow hydrocarbons. Although the test was unsuccessful, the Company and its partners were encouraged by the positive evidence of oil shows and the presence of good quality reservoirs and decided to deepen the well in order to evaluate the potential of the Lower Cretaceous, Jurassic and Triassic sections. The Shabeel North-1 well reached a total depth of 3,945 meters and encountered metamorphic basement at a depth of 3,919 meters. The well penetrated 149 meters of inter-bedded sands and shales of the Triassic Adigrat Formation with no oil or gas shows and only minor porosity exhibited on electric logs. Accordingly, the well was plugged and abandoned.

As the Upper Cretaceous Jesomma sands in Shabeel North-1, which exhibited porosity and hydrocarbon shows but produced only fresh water on a drill stem test, were similar to the Jesomma sands encountered in the previously drilled Shabeel-1 well in respect of log response and oil and gas shows, the Company and its partners determined that additional testing of these zones in the previously drilled Shabeel-1 well was not warranted. Accordingly, the well has been plugged and abandoned.

While the Company was disappointed that the first two exploration wells in Puntland (Somalia) did not flow oil, the Company remains highly encouraged that all of the critical elements exist for oil accumulations, namely a working petroleum system, good quality reservoirs and thick seal rocks. Based on the encouragement provided by the Shabeel wells, the Company and its partners entered the next exploration period in both the Dharoor Valley and Nugaal Valley PSA's which carry a commitment to drill one well in each block within an additional three year term ending October 2015.

Horn has demobilized the drilling rig and associated equipment and has completed restoration of both drilling locations. Efforts are now focused on making preparations for a seismic acquisition campaign in the Dharoor PSA which will include a regional seismic reconnaissance grid in the previously unexplored eastern portion of the basin as well as prospect specific seismic to delineate a drilling candidate in the western portion of the basin where an active petroleum system was confirmed by the recent drilling at the Shabeel and Shabeel North-1 locations. This seismic program is expected to commence in the first half of 2013. The Company continues to pursue efforts to drill an exploration well in the Nugaal PSA and is working with the Puntland government authorities to move this project forward.

Horn is in active discussions with potential joint venture partners and also is reviewing new venture opportunities in the region.

MALI

Blocks 7 and 11

The deteriorating security and political situation in Mali has halted operations on the Company's blocks. As a consequence, during the first quarter of 2012, the Company impaired $3.1 million of capitalized intangible exploration assets. The Company and its operating partner, Heritage, are in the final stages of exiting the blocks.