Central Petroleum: broker reaffirms strong buy with A$0.32 price target

Central Petroleum (ASX: CTP) has received a strong buy recommendation and a 12 month target price of $0.32 per share from a broker.

The following is an extract from the report

This report is an update to the earlier report on Central Petroleum Limited (ASX: CTP) issued in July 2011 and should be read in conjunction with that report.

CTP is a junior exploration and production company with extensive granted and pending tenement acreage in Central Australia, predominately in the Northern Territory totalling over 70 million acres, almost entirely 100% net owned.

Within this acreage large resources of oil, natural gas, helium and coal have been identified and/or inferred by independent geological assessment. These resources are located within four main geological structures; the Amadeus, Pedirka, South Georgina basins and the Lander Trough of the Wiso Basin.

On 11 January 2012, CTP announced significant oil flows from its Surprise-1 Re-entry H (S1REH) well. The oil flow from the S1REH was tested at 380 barrels per day of “light sweet crude” with an API Gravity averaging 40 Degrees, with some prospects for a further increase in flow-rate.

This is the first horizontal well completion in Central Australia producing oil and the first onshore discovery well in the Northern Territory producing significant oil flow for more than fifty years.

The company is seeking to finalise a sales agreement and within the next two to three months finalise the arrangements for an Extended Production Test. CTP is also considering its options for a second well and advancing its previously announced timetable.

The 11 January 2012 announcement significantly lowers the risk associated with CTP’s initial projects demonstrating not only the presence of oil in its target areas, but also the company’s ability to bring oil to market in accordance with its strategic plans.

We continue to rate CTP as a STRONG BUY with a twelve month target price of $0.32 per share. This is based on a “sum of parts” assessment of Central Petroleum’s short time-to-commercialisation projects, and the company as a whole, including factoring in the risks faced in bringing these projects to an operational phase.

The value per share of $0.0858 for the Surprise-1 project alone exceeds the current market price per share. Whilst undervalued, CTP has consistently outperformed the ASX300 energy stocks over the last twelve months.

The reduction in the twelve month target price compared to the previous report reflects, in part, a stronger Australian Dollar and a softening in global oil prices.

Further, CTP has increased its operational expenditure as a result of its drilling. Increased operational expenditure from further drilling and then operation of its wells will be increasingly offset as CTP receives revenue from oil sales.

Although significantly higher than current trading price, this valuation continues to reflect a heavily risked and realistic assessment of the value of CTP’s quick-to-market projects for which CTP has development plans and development capital reserves.

This valuation does not include any value potential from Central Petroleum’s longer term projects, such as unconventional resources or coal monetisation, despite the company progressing plans for commercialisation of its coal assets through farmout arrangements which will add additional value to the company without distracting from its principal oil and gas focus.