Company Overview: Carnarvon Petroleum Limited is engaged in oil and gas exploration, development and production. The Company's Phoenix Project consists of four exploration permits, including WA-435-P, WA-436-P, WA-437-P and WA-438-P, which covers an area of over 22,000 square kilometers in the northwestern region of the Bedout sub-basin within the greater Roebuck Basin. Its Cerberus Project has prolific oil producing exploration permits, such as EP-490, TP/27 and EP-491. It focuses on two hydrocarbon accumulations, which include Wandoo Oilfield and Stag Oilfield. The Wandoo Oilfield is located approximately 50 kilometers to the north with its primary reservoir at a depth of approximately 600 meters in the Early Cretaceous M.australis Sandstone. The Stag Oilfield is located approximately 20 kilometers to the north with its primary reservoir at a depth of approximately 700 meters. Its Buffalo Project includes Buffalo Oil Field and the undeveloped oil discoveries in the Bluff-1 and Buller-1 wells.
CVN Details
Understanding CVN’s Developments in 1H FY 2019: Carnarvon Petroleum Limited (ASX: CVN) is a small-cap company with the market capitalization of around $604.23 Mn as of March 15, 2019. The group focuses on the discovery and is engaged in oil and exploration activities. Talking about the company’s management, Mr. Adrian Cook is the Managing Director and Chief Executive Officer (or CEO) while Mr. Philip Huizenga is the Chief Operating Officer of Carnarvon Petroleum. The company had posted loss after tax from continuing operations amounting to $1,927,000 in half year ending December 2018 as compared to a profit of $391,000 in the same period of the previous year. In half-year ended December 2018, the Dorado-1 well got completed with the discovery of light oil, gas, and condensate in the number of reservoirs. Because of the significant nature of discovery, CVN and the joint venture partner Santos Limited, have started preparations to appraise the discovery and test potential of the follow-up prospects. Also, the Phoenix South-3 well got completed and encountered hydrocarbons in targeted Caley interval. Apart from these developments, preparations with respect to the redevelopment of the Buffalo oil field have also been advanced. The field is being transitioned to come under the exclusive jurisdiction of Timor-Leste as a result of the Maritime Boundary Treaty between Australia and Timor-Leste. The discussions between Carnarvon and the Government of Timor-Leste continued, and both the parties have agreed in principle to fundamental terms of production sharing contract. Additionally, CVN is developing its operational readiness and has commenced seeking the relevant approvals to drill the Buffalo East-1 well which is the key first step to redeveloping the oil field. Hence, we presume that the company has a decent outlook at the back of solid liquidity position, favourable business discussion, and the completion of Dorado-1 well with respect to discovery of light oil, gas and condensate in a number of reservoirs.
1HFY19 Income Statement (Source: Company Reports)
Decent Liquidity Footing Might Help Future Growth: The company is possessing decent footing with respect to the liquidity levels and is evident from its current ratio which stood at 23.39x at the end of December 2018 which is higher than the industry median of 1.26x showing sound liquidity position to meet its short-term obligations. We expect that CVN’s decent liquidity levels would continue to support it and might help to tap the long-term growth opportunities.
Also, at the end of December 2018, the company recorded other financial assets amounting to $1,341,000 as compared to the June 2018 figure of $2,297,000. This reflects the current value of the shares which are held by CVN in CWX Global Limited. As of now, the group focuses on its strategic framework which revolves around to discover, develop and produce which might strengthen the company’s commitment as a mid-tier producer with a sustainable production model.
Strategic Framework (Source: Company Reports)
Analysing Expenses Incurred by CVN: In the half year ended December 2018, CVN capitalized an additional $16,498,000 towards exploration expenditure and these costs were mainly associated with the drilling costs for Dorado-1 and Phoenix South-3 wells and the preparations for drilling of Buffalo East-1. The company incurred $1,135,000 towards new ventures and advisory costs as CVN is building a significant regional geological database which has been key in the identification of highly prospective opportunities within the North-West shelf of Australia.
CVN’s administrative and head office costs amounted to $1,218,000 in the half year ended December 2018 while in the same period of the previous year it was $637,000. This rise in administrative costs was because of higher corporate and planning activity following the Dorado discovery. On 11 February 2019, insurance underwriters of Carnarvon Petroleum had agreed for the payment amounting to US$1,913,000 with regards to the part payment for successful insurance recovery claim. The claim would reimburse the substantial portion of costs incurred for drilling of the Phoenix South-3 well which was designed as re-drill of Phoenix South-2 well. Also, on February 19, 2019, Carnarvon Petroleum wrapped up the placement which was made to the institutional and sophisticated investors and, as a result, the company garnered $50,028,000.
Capital Raising Strengthens Balance Sheet: Carnarvon Petroleum had earlier made an announcement about the capital raising amounting to $50 million (before costs) which resulted in the issue of 151.6 million new shares involving an issue price amounting to $0.33 per share. The raising of capital was through the placement of Australian and global institutions and sophisticated investors. The raising gives additional funding which would be deployed towards CVN’s appraisal and exploration activities in Australia’s North West Shelf and towards engineering and design studies relating to Dorado.
However, the raising would also be deployed towards appraisal of Dorado discovery by drilling the Dorado-2 and Dorado-3 wells, engineering and design studies for the development of Dorado field, towards drilling of prospective Roc South-1 exploration well which is located between Roc and Dorado fields and for potential 3D seismic acquisition over prospective exploration acreage including Pavo and Apus prospects. This funding will ensure that the company is in a strong financial position going into its exciting 2019 program.
Highlights of Buffalo Oil Field: Carnarvon Petroleum stated Buffalo oil field as a proven oil field, and this is also evident from the achievements. In 1999, 50,000 barrels of oil per day (or bopd) flowed from first two wells and, between 1999 and 2004, production of 20 million barrels were witnessed from four wells. However, when the production stopped in 2004, 4,000 barrels of oil per day were still flowing. CVN’s planned wells would be re-entering the former producing area of the oil field. Also, additional oil is expected from newly mapped attic within the field.
The estimate of capital cost is US$150 million, and the operating cost estimate is in the range of US$80 million-US$100 million per annum.
Quarterly Rebalance of the S&P/ASX Indices: S&P Dow Jones Indices has recently announced March 2019 quarterly rebalance of S&P/ASX Indices. As a result, Carnarvon Petroleum Limited is now being added in S&P/ASX 300 Index and this would be effective at the open on March 18, 2019. Also, Carnarvon Petroleum Limited has been in All Ordinaries which would also be effective from the same date and at the same time. This might augur well for the technical demand for the shares of CVN since the demand for the shares from ETF’s might increase in the upcoming period.
What Might Drive Growth For CVN: The strategic framework of Carnarvon Petroleum revolves around to discover, develop and produce. Moving forward, Dorado-2 appraisal well seeks to confirm the extent of oil in Caley sand and the company also stated that penetrating the Baxter and Milne sands would enable an assessment of resources at the location. Dorado-3 appraisal well would collect more information on reservoir and hydrocarbon properties in the Caley sand. With regards to Dorado oil field development, the company stated that work is underway on the development plans for the production of oil from Caley sand. Carnarvon Petroleum stated that Buffalo well would confirm the attic and therefore the quantum of producible oil and there are expectations that the well would be retained as the first of three production wells. The company’s core business streams revolve around Dorado, Buffalo, Explore and Financial.
With respect to Dorado, the exciting appraisal well program and field development planning have been scheduled for 2019. For field development, the final investment decision has been scheduled for 2020. With respect to Buffalo, the company stated that first well would be confirming the oil volumes and progress towards development phase in 2020. The first oil production has been targeted for 2022. The company also plans to continue to build the quality portfolio of highly attractive drill ready prospects utilizing the knowledge and data focused towards the North West Shelf.
Investment Summary (Source: Company Reports)
Stock Recommendation: Carnarvon Petroleum Limited’s stock had delivered strong returns from the past few months (40.63% in the span of the past 3 months) while, in the previous one month, it delivered the return of 20%. These attractive returns can gain the attention of market players. Also, we expect that the company would be supported by its financial position as it enables the company to tap various growth opportunities. The company’s top management had reflected favourable views with respect to its recent capital raising. However, the company is exposed to some risks related to commodity prices and exploration and production. Carnarvon Petroleum stated that its financial performance and results might be impacted by the exposure towards the commodity price risk through realized price received from the sale of hydrocarbons like gas, crude oil, and condensate. Based on the foregoing, any favourable oil price and production scenario and current trading level, we have a “Speculative Buy” recommendation on the stock at the current market price of A$0.445 per share (down 1.111% on March 15, 2019).
CVN Daily Chart (Source: Thomson Reuters)
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