Company Overview: Carnarvon Energy Limited (ASX: CVN) operates a high-quality energy assets portfolio in Western Australia. CVN undertakes the exploration and development of the Dorado field (~20%) in alliance with Santos Limited. It has an exploration licence in the Greater Bedout Area (~20-30%) with ~100 identified prospects. CVN is also progressing a biorefinery project with Frontier Impact Group (FIG) for renewable fuels development.

CVN Details

Project Operations During 1HFY22 (31 December 2021):

• Dorado Project Development: CVN advanced on the Front-End Engineering and Design (FEED) activities at the Dorado project during 1HFY22.
• Biorefinery Project Update: Recently, CVN has formed a JV, FutureEnergy Australia Pty Limited (FEA), with FIG to produce renewable fuels and ACCUs (Australian Carbon Credit Units). In January 2022, FEA started the FEED activities to implement an FID.
  

Robust Commodity Forecast: The demand for light crude refined products (such as in petrochemicals, jet, and other transport fuels) is strong and in line with the Dorado project offering and production schedule. Rising energy demand from the Asia Pacific region is also anticipated to aid the project's production.

Key Metrics: CVN had a current ratio of ~47.01x in FY21 versus the industry median of ~1.36x. This indicates the company has adequate liquidity to fund its production and exploration plans.

Top 10 Shareholders:

The top 10 shareholders together form ~9.81% of the total shareholding. The Vanguard Group, Inc.  and Nero Resource Fund Pty. Ltd. hold a maximum stake in the company at ~1.91% and ~1.80%, respectively.

Source: Analysis by Kalkine Group

Key Risks:

• Commodity Price Risk: CVN’s financial performance is exposed to the changes in the oil and gas prices. A material decline in the realised prices can hurt the prospects and the ability to fund exploration and development activities.
• Operating Risks: CVN faces many operating risks, such as pipe failures, fire, explosions, environmental hazards, etc., in the industry. Such risks can lead to the destruction of assets/ loss of life, etc., and cause exploration or production delays.

Project Timelines for FY22:

• CVN is engaging with parties for exploring funding options for the Dorado project. The Dorado facility initially targets to produce ~75K - ~100K barrels of oil per day. CVN plans to undertake a final investment decision (FID) in mid-2022.
• CVN plans to undertake the high impact exploration drilling at the Apus-1 well targets in the Bedout Basin.
• CVN targets the first production from the biorefinery JV project in Q4FY22 or early Q1FY23

Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of CVN gave a negative return of ~4.41% in the past three months. The stock is trading slightly lower than the 52-weeks’ average price level band of ~$0.212 - $0.435. The stock has been valued using the EV/Sales multiple-based-illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at some discount than its peers’ median EV/Sales multiple, considering nil revenue from core projects, negative bottom line, and net operating cash outflows. For this purpose of valuation, a few peers like Woodside Petroleum Ltd. (ASX: WPL), Strike Energy Ltd. (ASX: STX), Helios Energy Ltd (ASX: HE8), and others have been considered. Considering the robust commodity outlook, the exploration potential of the Apus-1 well, the material discovery at the Pavo-1 well, low debt levels, de-risking initiatives, progress at the FEA venture and Dorado project, an indicative upside in valuation, associated key business risks, we give a ‘Speculative Buy’ rating on the stock at the closing market price of $0.320, down by ~4.478%, as of 6 April 2022.

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

CVN Daily Technical Chart, Data Source: REFINITIV  

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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