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.”
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.
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
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.
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