Carnarvon Petroleum (ASX: CVN) is raising up to $12 million through an entitlement offer to ensure it is appropriately funded as it enters into drilling of the high impact Phoenix South-1 well in the North West Shelf off Western Australia.
This will be via a pro rata non-renounceable entitlement offer of 1 new ordinary share for every 5 ordinary shares at $0.064 per share.
Each share includes a free attaching listed option exercisable at $0.10 on or before 29 December 2015.
Phoenix South has multiple trillion cubic feet of gas potential and the company is free carried by Apache Corporation (NYSE: APA) and JX Nippon Oil & Gas Exploration to a cap of US$50 million.
The entitlement offer will ensure the company can meet additional costs beyond this cap.
Apache is expected to spud the Phoenix South-1 well using the Atwood Eagle semi-submersible rig between mid-December 2013 and mid-January 2014.
"The technical work of Apache, the operator of the imminent Phoenix South-1 well, indicates additional reservoir potential in the well, deeper than that contemplated in the 2012 farm out," Carnarvon managing director Adrian Cook said.
"This, together with the rig's availability falling in the Western Australian cyclone season, has led to the board to resolve to initiate this entitlement offer to ensure prudent capital management and maximum financial flexibility during the drilling of this high impact well.
"The board also decided to structure the form of this offering to enable existing shareholders to have the first entitlement to participate and fund the company through this exciting drilling phase."
While the entitlement offer will not be underwritten, the company reserves the right to obtain an underwriter at any stage.
Carnarvon has a 20% interest in the WA-435-P and WA-437-P permits that host the Phoenix South Prospect.
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 has increased, making these historic discoveries potentially economic.
Recent 3D seismic data has upgraded the Phoenix South Prospect as a multi trillion cubic foot prospect that is in close proximity to the proven gas reservoirs in lower Triassic reservoirs at the Phoenix-1 well.
The prospectivity of the permits and the Phoenix South Prospect drew Apache and JX Nippon to farm-in to a 20% and 10% interest, or a total of 40% and 20%, respectively from both Carnarvon and Finder Exploration.
Apache and JX Nippon had in return agreed to free carry both companies for the drilling of Phoenix South and the contingent Roc Prospect to an agreed cap.
Besides their gas potential, both prospects 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
Use of Funds
Should the entitlement offer raise the full $12 million, proceeds will be used as follows:
- $5 million as provision for potential additional costs associated with encountering hydrocarbons including deepening the well from the previously planned 4,500 metres to 5,000 metres, additional well liner to safely manage drilling through high gas prone zones and additional success case wireline logs;
- $5 million for additional costs associated with the drilling rig only being available to drill the Phoenix South-1 well during the cyclone season; and
- $2 million for working capital and other costs.
Any funds received by on exercise of the new options will be used to fund the company's future exploration and production programs at the time of exercise and for general working capital purposes.
The multi-Tcf of gas Phoenix South-1 well represents a game changer for Carnarvon Petroleum.
While its current net Proved and Probable Reserves in Thailand stands at a respectable 12.2 million barrels of oil, this is dwarfed by the potential of the Phoenix South prospect.
At a 20% interest, a successful discovery could give the company access to multiple hundred billion cubic feet of gas and up.
To put this into prospective, current domestic gas prices in Western Australia are about A$8 per gigajoule (about 920 cubic feet of gas) while current LNG pricing in Asia is about double of that. This would mean prospective revenue of between $870 million and $1,740 million for every 100 billion cubic feet of gas.
Both Apache and JX Nippon are multi-billion energy producers and developers of energy with Apache well familiar with exploring in the region, which considerably de-risks the well.
A success will also de-risk the Roc prospect and increase the prospectivity of the other leads in the permit.
Proactive Investors Phoenix South could provide a double or triple "play" on the company's current market cap of $71.27 million.
As such, on our estimates, we believe that Carnarvon Petroleum's current share price of $0.076 does not reflect anywhere near its underlying value.
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