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

A Quick Overview of Q3 FY 2019 Results: Carnarvon Petroleum Limited (ASX: CVN) is a small-cap oil and gas company that acquires, explores, and develops oil and gas properties. As on May 10, 2019, the market capitalisation of the company stood at ~$563.95 million. The company recently released its Q3FY19 results wherein the management stated that CVN and its Joint Venture partner, Santos, significantly advanced preparations to appraise Dorado discovery. The company stated that Roc South-1 exploration well would be added to 2019 drill program and would commence after Dorado-2 well. The Roc South prospect is situated 13km from Dorado discovery and contains very similar characteristics giving Roc South a relatively high chance of success by the industry standards and a successful result would mean that these resources could be included in Dorado development. Also, the company wrapped up A$50 million (before fees) placement to the institutional and sophisticated investors during Q3 FY 2019. This capital raising witnessed strong interest and would ensure that CVN has strong financial position for highly anticipated 2019 exploration as well as appraisal program. The company’s net cash used in operating activities stood at $1.808 million in Q3 FY 2019 and, during the same period, it incurred payments amounting to $1.19 million towards exploration and evaluation. However, $0.600 million has been incurred towards administration and corporate costs. Moving forward, the sound liquidity levels and respectable Asset/Equity ratio can be considered as the primary factors which might attract the attention of the investors. Moreover, we believe that the appraisal results of the Dorado discovery are the future growth catalyst of the company in relation to becoming a competitive oil and gas producer in Australia. Also, capital raisings done by the company can help it in meeting its long-term growth objectives.


Net Cash Used in Operating Activities (Source: Company Reports)

Top 10 Shareholders: The following chart gives the broad overview of the top 10 shareholders of Carnarvon Petroleum Limited:
 
Top 10 Shareholders (Source: Thomson Reuters)

Decent Assets/Equity Ratio and Sound Liquidity Levels: The current ratio of CVN stood at 23.39x in 1H FY 2019 which is significantly higher than the industry median of 1.66x, reflecting a sound liquidity position to address its short-term obligations. Also, the improved liquidity standing reflects that the company has sufficient headroom for further growth as it can make necessary deployments towards the business activities.

In 1H FY 2019, the company’s Assets/Equity ratio stood at 1.02x which is lower than the industry median of 2.15x and, thus, it looks that the company’s assets are being financed primarily by the equity and it has lesser reliance on debt. Therefore, relatively better balance sheet position might help the company in fetching the attention of market players.

Update on Commencement of Drilling of Dorado-2 Well: CVN recently stated that the drilling of Dorado-2 appraisal well has commenced. The release issued by the company stated that since arriving at Dorado-2 location, around 2.2 km from original Dorado-1 well location, the rig had successfully concluded the ready to operate process and drilled the surface hole and installed surface casing. With respect to forwarding plan, the rig would drill 17 1/2” hole to planned section depth of around 1,200 metres Measured Depth (or MD) followed by setting 13-3/8” casing. Dorado-2 happens to be the first appraisal well of Dorado oil and gas field.

Following Dorado-2 well, the rig is scheduled to drill the near-field exploration well Roc South-1 followed by the Dorado-3 appraisal well. Dorado and Roc South reside in WA-437-P in which CVN holds 20% interest.

Noble Tom Prosser Jack-Up Drilling Rig Now Close To Being On Dorado-2 Well Location: Carnarvon Petroleum had made an announcement that Noble Tom Prosser jack-up drilling rig began mobilising from Corvus-2 well location at 24:00 hours on April 26, 2019 and is now close to being on Dorado-2 well location. The Dorado-2 well is planned as a down-dip appraisal well to delineate the hydrocarbon contacts in the Caley, Baxter and Milne Members of Lower Keraudren Formation. The results from the well would be used to increase subsurface certainty as well as provide additional comfort that Dorado structure has sufficient hydrocarbons in order to support a development.

The company’s top management stated that there are expectations that 2019 drilling program might be most significant in CVN’s history with 3 important wells designed to solidify the case for substantial oil and gas development.

Completion of negotiations with Government of Timor-Leste: Carnarvon Petroleum Limited had also stated that it has materially wrapped up the negotiations with Government of Timor-Leste with regards to Production Sharing Contract (PSC). The company advanced its plans to redevelop the Buffalo oil field with submission of exploration and appraisal drilling plans to government authorities during Q3 FY 2019. At the end of Q3 FY 2019, the company had robust cash balance of A$93.3 million after the capital raise.

The exploration expenditure during Q3 FY 2019 amounted to A$1.2 million, included technical work, planning and long lead items for 2019 Dorado and Roc South drill campaign, and preparatory work on the Buffalo oil field redevelopment project. With respect to Phoenix project, the company stated that Dorado-2 well is targeting the hydrocarbon columns in a down-dip location from the Dorado-1 discovery. This is to provide more information on the extent of hydrocarbon accumulations and further calibrate the reservoir and fluid properties. Following Roc South-1 exploration well, the final firm well of 2019 drill campaign is the Dorado-3 appraisal well. Dorado-3 plans to include drill stem tests which would be critical to understand reservoir performance and obtain the fluid samples required for the design of the Dorado production facilities.

A Quick Overview of Buffalo Project – WA-523-P: Carnarvon and the Timor-Leste government agency Autoridade Nacional do Petróleo e Minerais (ANPM) have agreed in principal to the fundamental terms of the PSC (or Production Sharing Contract). The discussions have highlighted that all the parties involved are aligned in their desire to achieve the first oil as soon as practical. CVN had advanced all of its workflows to enable it to accelerate the project once the finalisation of Treaty is done.

The company had continued the farm-out process during Q3 FY 2019, seeking expressions of interest from potential partners to the Buffalo project.

Rise in Cash Holdings, Wrapping Up of Capital Raising: Carnarvon Petroleum Limited’s cash holdings at Q3 FY 2019 end were $93.3 million as compared to $48.3 million at the end of the previous quarter. The company had wrapped up a capital raising to the institutional and sophisticated investors and, as a result, it raised $47.1 million (net of costs, taxes, and fees). During Q3 FY 2019, A$1.2 million was spent towards exploration activities in North-West Shelf which mainly included planning and long lead item costs for Dorado-2, Dorado-3 as well as Roc South-1 wells. Additionally, CVN spent $0.9 million towards business development and corporate costs.

What To Expect From CVN: Carnarvon has built a significant position in the Australian oil and gas industry to reap the benefits of an improving market. The company also stated that it would work towards maturing the identified leads into prospects within the permit and would utilise its geoscience workflows to add to its portfolio. Also, there are expectations that Carnarvon Petroleum Limited would be supported by its lesser reliance on debt when it comes to financing its assets (considering 1H FY 2019 Assets/ Equity ratio) as this might help it in making deployments towards the specific business objectives. The company’s sound liquidity standing (as evident from the current ratio of 1H FY 2019) can also help it in making deployments which could help it in witnessing long-term growth.

The following picture gives a broad overview of catalysts over the span of the next 12-18 months:

Catalysts Moving Forward (Source: Company Reports)

Stock Recommendation: The stock of Carnarvon Petroleum has delivered the return of 27.27% on the YTD basis. However, in the span of the previous six months and three months, the stock had posted the return of 9.09% and 13.51%, respectively. Also, the company’s RoE (or return on equity) stood at 1.3% in FY 2018 which reflects a YoY rise of 32.8% and thus it can be said that the company has been focusing on delivering returns to its shareholders which can attract the attention of market players.

In the annual report for FY 2018, the company stated that it does not use derivative financial instruments in order to hedge the financial risk exposures and, as a result, it is exposed towards the daily movements in the international oil prices, exchange rates, and interest rates. The company added that it manages the cash positions in the US Dollars and Australian Dollars in order to hedge its foreign exchange rate exposures having regard for likely future expenditure. In our view, the appraisal results of the Dorado discovery constitute the future growth catalyst of the company in relation to become a competitive oil and gas producer in Australia. Hence, considering the aforesaid parameters and current trading level, we give a “Speculative Buy” recommendation on the stock at the current market price of A$0.440 per share (up 4.762% on 10 May 2019).


CVN Daily Chart (Source: Thomson Reuters)

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