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Carnarvon Petroleum Ltd: THE INVESTMENT CASE

Carnarvon Petroleum enters 2018 with multiple share price catalysts including the prospect of a takeover

Hartleys has a 12-month share price target of $0.25 on the stock implying upside of nearly 100%.
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INVESTMENT OVERVIEW: CVN The Big Picture
Extensive drilling is expected to take place between March and May, providing possible share price momentum

Carnarvon Petroleum Limited (ASX:CVN) is viewed by analysts at Hartleys as an under-appreciated oil play particularly given its leverage to a recovering oil price.

Indeed, it is difficult to find an oil junior that offers numerous share price catalysts that include the exploration of multiple highly prospective projects, and even the prospect of a takeover.

The company is cashed up for its accelerated exploration program, finishing the December quarter with nearly $50 million in net cash.

Estimated cash outflow for the next quarter is close to $10 million.

Carnarvon lays the foundations in December half

During the six months to 31 December 2017, Carnarvon made significant progress on its most northerly field off Western Australia, the Buffalo project.

The company completed technical work which identified the potential for redeveloping the existing Buffalo oil field.

In addition, Carnarvon, along with its joint venture partner Quadrant Energy, began preparation for the Phoenix South-3 well in the WA 435P permit and the Dorado-1 well.

Carnarvon has a 20% stake in these projects.

Substantial first half newsflow anticipated

The wells are expected to commence in March/April 2018 and May 2018 respectively.

The company was also awarded two new permits AC/P62 (Condor) and EP 497 (Santa Cruz) during the half year, which represents a continuation of its strategy to acquire quality assets within the North-West Shelf.

Phoenix South-3 poised for April start

Carnarvon said the drill rig for the Phoenix South-3 well was expected to be in position off the coast of Western Australia by the end of March.

The semi-submersible Driller-1 will be targeting a mean recoverable 489 billion standard cubic feet (bscf) of gas and 57 million barrels of gas condensate.

READ: Carnarvon Petroleum says drill rig will be at Phoenix South-3 well site by the end of March

Operated by Quadrant Energy, the latest well is just 560 metres from the Phoenix South-2 discovery.

Gas and condensate in the Phoenix South structure is in addition to that in the Roc structure.

The gross contingent resource at Roc is 332 bscf of gas and 19 million barrels of condensate.

Potential for lower cost drilling at Eagle Project

Hartleys’ positive take on the company appears justified given the prospect of establishing production in areas where oil can be sourced at shallow depths, making for low-cost drilling.

Carnarvon's projects are in the prolific North West Shelf.

This is particularly the case with the recently acquired Eagle Project, a 585 square kilometre permit in shallow water with multiple targets.

It is in the same proven oil producing basin that includes the Talbot, Jabiru, and Cassini/Challis oil fields.

Carnarvon backs its leading technology to unlock value

Carnarvon prides itself on applying leading technologies to its technical work, assisting in unlocking production potential.

The Cygnus MC3D (Phase III) survey being acquired by Polarcus over about 542 square kilometres of the recently awarded project is expected to create a new standard in the interpretation of the prospectivity in this permit.

Adrian Cook, managing director said: “The Eagle Project is another demonstration of our team’s ability to acquire oil-prone exploration permits within proven petroleum systems.

“This is Carnarvon’s second permit within the Vulcan sub-basin, adjacent to the Skua and Cassini/Challis oil fields.

“Given the shallow water depths, jack-up drilling is possible, meaning the potential for lower cost drilling and field developments in the permit.”

Carnarvon could be a takeover target

Hartleys also believes there is the potential for corporate activity given the group is now one of the largest independent owners of uncontracted gas in Western Australia.

Acquisition activity isn’t new to operators in that region.

AWE Ltd (ASX:AWE) attracted takeover interest in 2017 and Hartleys juxtaposed whether 2018 will see the losing bidders on AWE, or even another third party, come to the table.

At the end of November, China Energy Reserve and Chemical Group Co made a bid for AWE attracted by its Waitsia asset which was subsequently trumped by Mineral Resources (ASX:MIN).

Underlining the fierce competition for energy in Western Australia, Mitsui & Co Ltd (TYO:8031) came over the top with a superior bid.

Consequently, there are two players who failed in their asset grab that have demonstrated their appetite for Carnarvon-type projects.

Share price implies upside of circa 100% to Hartleys target price

Hartleys has a speculative buy rating on Carnarvon based on a combination of an attractive valuation relative to its enterprise value to barrels of oil equivalent and takeover appeal.

The broker has a 12-month share price target of $0.25 on the stock.

While the company’s shares have roughly doubled in the last six months, the recent 12-month high of 15 cents is well shy of Hartleys' 12-month target price of 25 cents.

However, any one of the numerous share price catalysts could see the company trading more in line with the broker’s valuation.

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Carnarvon Petroleum Ltd Timeline

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