Overview: Carnarvon Petroleum Limited (“Carnarvon”, “the Company”) is an oil and gas exploration company focused on the North West Shelf of Australia. Carnarvon’s assets incorporate a 100% interest in the Cerberus project (permits covers ~3,700 km2) and a 20% interest in the joint venture exploration project in the Phoenix area (permit covers ~22,000 km2). An independent resource assessment has determined contingent resources of 31m and prospective resources of 72m barrels of oil for the Phoenix project.
Catalysts: Carnarvon’s Roc-1 exploration well is scheduled to commence drilling in the 2015 December quarter. The Company made a significant oil discovery in the Phoenix South-1 well in August 2014, the largest of its kind in more than 20 years. Carnarvon Petroleum is well funded with zero debt and more than $100m cash after divesting its Thailand assets earlier this year. Management has a strong track record in the industry.
Hurdles: There is no guarantee that existing resources can be converted into economically recoverable reserves. Oil prices have declined sharply over the past year and further falls would restrain the Company’s ability to generate future earnings. Carnarvon’s share registry is relatively fragmented and could leave the Company open to takeovers below the fair value of its securities.
Investment View: Carnarvon Petroleum provides speculative exposure to the domestic oil and gas industry. We are attracted to the magnitude of its land package, management track record, and its strong balance sheet. Oil prices remain volatile and there is no guarantee that the Phoenix project will yield economic benefits. With Carnarvon’s current share price tracking close to its cash backing, and the company free carried on the upcoming Roc-1 well, little value has been ascribed to its exploration assets. Whilst the technical chance of success at Roc-1 has been estimated at 42 percent, we favour the balance of risks and initiate coverage with a ‘speculative buy’ recommendation.
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