Carnarvon Petroleum thinks differently, reaps rewards
Carnarvon Petroleum (ASX: CVN) has been on the tear in recent months since announcing the sale of half its Thailand oil assets for up to US$65 million (A$70.3 million) with its shares up 52% since December 2013.
We can begin to see why.
Notably,
the company, which today updated Thai oil reserves in line with
previous year’s, had acquired the assets for $20 million and will retain
ongoing cash flow from its remaining 20% interest.
Along with
its cash at hand of $20 million, this implies a value of its Thai assets
of up to $160 million, well above its market capitalisation of circa
$98 million.
Carnarvon had on 3 March announced the sale of half
its 40% interest in Concessions SW1, L44/43 and L33/43 to Singapore’s
Loyz Energy (SGX: 594) for an initial US$33 million on completion and up
to US$32 million to be paid annually at the rate of 12% of the buyer’s
future revenue, to a limit of US$10 million per annum.
The
onshore Concession SW1, Concession L44/43, and Concession L33/43 have
been independently assessed by Chapman Petroleum Engineering Ltd to host
Proved and Probable Reserves of 11.8 million barrels of oil net to
Carnarvon (pre-sale).
This includes high confidence Proved Reserves of 3.2 million barrels of oil.
Carnarvon
and its Thailand joint venture partner operating partner Towngas have
also successfully constrained gross well flow rates to a stable and
sustainable level at or above 3,000 barrels of oil per day.
“We
are pleased to see that the most recent independent reserves review from
Chapman Engineering is in line with the previous year’s assessment,”
Carnarvon managing director Adrian Cook said.
“Recent fieldwork
on the Thailand Concessions has successfully choked back production to
reduce flow rates and stabilize production at around 3,000 bopd, in-line
with expectations. This aims to sustain production for longer periods
than occurred in previous years.”
Thailand Assets
Carnarvon Petroleum had received 94,760 barrels of oil from its Thai assets during the half year to 31 December 2013.
These
were sold at an average price of $101.78 per barrel, generating sales
revenue of $9.6 million and a gross profit of $2.9 million.
Ongoing
drilling, continued improvement due to the water flood project and
workover campaigns are expected to further improve production in the
coming quarters.
The success of the recent WBEXT-2BST2 well,
which commenced production in the last quarter at rates of about 175
barrels of oil per day with 40bpd of water and 500,000 standard cubic
feet of gas, bodes well for the ongoing drilling program.
North West Shelf, Western Australia
Carnarvon Petroleum is preparing for the drilling of the Phoenix South-1 well that has multiple trillion cubic feet of gas potential by operator Apache Corporation (NYSE:APA).
Drilling
of the well is currently scheduled for the June 2014 quarter, reducing
the risk of cyclones affecting the Phoenix South-1 operations.
Apache is funding drilling of the well and the contingent Roc-1 well to a cap of US$70 million each.
Phoenix
South is located on the border of WA-435-P and WA-437-P, which together
cover about 28,000 square kilometres of contiguous acreage that are
considered to be highly prospective for discovery of hydrocarbons.
The
permits include gas discoveries made in the early 1980’s by BP at
Phoenix-1 and Phoenix-2 that were considered uneconomic due to low gas
prices at the time they were made.
Since then, rising gas
prices both on the domestic and export liquefied natural gas markets
have increased, making these historic discoveries potentially economic.
Besides
their gas potential, both Phoenix South-1 and Roc-1 have the potential
to contain liquids-rich gas based on Phoenix well mud logs in comparison
with mudlogs from condensate-rich North West Shelf gas fields.
Given
the potential scale of the resource and its proximity to existing and
under construction infrastructure – including LNG, a success at Phoenix
South has multiple options for development.
In addition, a number of other oil and gas leads are present in the two permits.
Analysis
With the latest Reserves update in line with previous years’, Carnarvon Petroleum’s strategy to transform an existing sandstone field into a high value igneous and sandstone asset have clearly paid off.
Nowhere
is this clearer than its deal to sell half its 40% interest in its
three onshore Thailand oil producing assets to Singapore’s Loyz Energy
for up to US$65 million – US$33 million on completion and future sale
royalty of up to US$32 million.
This represents an excellent
return on its initial investment of A$20 million and a clue as to
Carnarvon's strategy and re-rating.
The sale to Loyz, its cash
of $20 million (over $50 million post-sale) and its remaining 20%
interest in the producing Thailand oil assets grant an implied valuation
of about $160 million.
Not only is this well above its current
market cap. of circa $98 million, it does not take into account the
exciting Phoenix South-1 well and contingent Roc-1 wells that are due to
be spudded in the Carnarvon Basin offshore northwestern Australia by
Apache.
With the company free carried for its 20% interest to a
cap of US$70 million for each well by Apache, it is leveraged to the
drilling of exploration wells targeting multiple trillion cubic feet of
gas potential at minimal risk.
Drilling of Phoenix South-1 is currently scheduled for the June 2014 quarter, reducing the risk of cyclones on operations.
This
leaves the company leveraged to successes in its Carnarvon Basin
exploration program along with any further developments – Reserve
upgrades and/or production increases – in Thailand.
Showing the way, Carnarvon has two
farmed out wells – 20% free carried to US$70m per well; has on-going
cash flow from Thailand production, with no debt and minimal permit
commitments.
Proactive Investors believes that Carnarvon Petroleum is undervalued at its current share price of $0.087 per share
reflecting a sum of the parts valuation and a share price target of
between $0.14 and $0.16 within 6-9 months.
