Carnarvon Petroleum Limited

CVN Details

Carnarvon Petroleum Limited (ASX: CVN) is mainly involved in the exploration of oil and gas. The company recently commenced Front End Engineering and Design (FEED) activities for the Dorado oil development.

Operations Update

• Progress on Renewable Diesel Venture: As announced on 30 September 2021, CVN updated its progress with biorefinery JV, partnered with Frontier Impact Group. Results showed low emissions in renewable diesel produces relative to petroleum diesel and other biofuels.
• Buffalo Project Update: As announced on 22 September 2021, the Commencement of the project, Buffalo-10 well, is on schedule and is expected to spud in early November. Mid case recoverable volume is estimated at 31 million barrels. CVN reports strong possibilities for Buffalo-10 to confirm a sanctionable development project.

FY21 Critical Business Updates

• Dorado & Buffalo remain CVN’s focus points due to estimated short payback periods and the potential to generate significant cash flows.
• The FEED milestone was achieved in June 2021 with binding contracts for the Well head platform and FPSO (now issued).
• For Dorado phase 2, JV has made significant provisions to accommodate Dorado gas export and Pavo or Apus success in gas & liquids.
• Buffalo field redevelopment seeks the first production post-Buffalo-10 well while maintaining less than US$25/barrel cost targets.

FY21 Financial Update

• Net Income: CVN reported gains of $17.136 million for the year relative to a loss of $4.137 million incurred last year. The profit was primarily driven by a $23.635 million gain from the loss of control of the subsidiary.
• Cash Flows: Cash outflow from operations stood at $4.857 million, with no material changes last year. Cash used in investing activities declined to $9.473 million relative to $34.975 million in FY20. Support from financing activities was minimum at $378,000.
• Financial Position: Cash position declined to $98.436 million, relative to $113.632 million in FY20. Total reported assets stood at $257.274 million relative to $239.244 million in FY20. CVN holds a debt-free balance sheet.

Financial Performance FY21, Analysis by Kalkine Group

Key Risks

The company is exposed to the risks associate with volatilities in the oil and gas process. In addition, CVN is also exposed to the risks and uncertainties caused by the COVID-19 pandemic, as it could disrupt its operations.

Outlook

CVN actively diversifies energy and revenue streams with Dorado liquids, Dorado & Roc gas, Buffalo liquids and Renewable diesel & biochar. Further, the Buffalo project is providing CVN with an opportunity to deliver a low-cost oil development poised to strengthen the oil market.

Valuation Methodology: Price/Book 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 positive return of ~41.035% in the past one year. The stock is currently trading higher than the 52-weeks’ average price level band of $0.217 - $0.360. The stock has been valued using the Price/Book Value multiple-based illustrative relative valuation method and arrived at a target price low single-digit downside (in percentage terms). Considering diversified energy and revenue streams, the company might trade at a slight premium to its peers’ average. For valuation, few peers like Empire Energy Group Ltd (ASX: EEG), Senex Energy Ltd (ASX: SXY), Cooper Energy Ltd (ASX: COE) have been considered. Considering the current market conditions, potential competition, potential easing in crude oil prices, and strict regulations, current trading levels, key risks associated with the business, and downside indicated by valuation, we suggest investors to book profits and give a “Sell” recommendation on the stock at the market price of $0.330, as of 14 October 2021, 10:30 AM (GMT+10), Sydney, Eastern Australia.

CVN Daily Technical Chart, Data Source: REFINITIV

Note: The purple line reflects the RSI (14-day period)

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.

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