At the time the report was issued Carnarvon was trading at $0.115.
The broker believes the Phoenix South-1 oil discovery bodes well for further exploration success offshore Western Australia.
The numbers: Phoenix South and beyond
While the resource numbers contained within the Independent Resource Assessment may have been below market expectations, there remains a lot to like about the Carnarvon Petroleum (CVN) story.
With an estimated A$98m (9.5cps) cash at bank CVN has a war-chest with which to add to its Australian acreage position (early stage exploration at low cost) as well as providing downside protection for the stock.
Investors also get to participate in the Roc-1 well which is expected to be drilled in 4Q CY15 for which CVN is carried to a cap of US$70m.
We have reduced our valuation on CVN to 18cps from 28cps because of the lower than expected resource guidance.
We maintain our Speculative Buy recommendation on the stock.
Independent Resource Estimate
CVN commissioned DeGolyer and MacNaughton to conduct an Independent Resource Assessment of the Phoenix 3D seismic area (containing Phoenix South and Roc).
Phoenix South and Phoenix were assessed as having a Gross Contingent Resource (best estimate) of 31MM bbls (6.2MM bbls net to CVN).
Based on these numbers we think it would be unlikely that Phoenix South would be viable as a stand-alone development but could be tied-back to a larger development associated with a discovery at Roc.
Other prospects within the Phoenix South 3D area had a combined Gross Prospective Resource Estimate (BEST) of 73MM bbls un-risked with a risked estimate of 25MM bbls (5MM bbls net to CVN).
The largest of these was the Roc prospect which was assessed as having a prospective resource (best estimate, unrisked) of 42MM bbls (8.4MM bbls net to CVN).
The report was able to confirm Apache's original oil in place estimate of 300MM bbls (296MM bbls confirmed).
This would assume a recovery factor of 19% (best estimate recoverable volume being 56MM bbls).
Historically recovery factors on the North West Shelf have ranged between 20% and 30%.
Roc-1 well - expected to spud in 4Q CY15
According to CVN's announcement Apache plans to drill the Roc-1 well in 4Q CY15.
Apache has contracted Noble Corporation's new build jack-up, the Tom Prosser, from September this year for a "sustained programme of exploration and development wells in the Carnarvon basin".
CVN is carried to a cap of US$70m for this well.
Given the sharp decline in rig rates over the last 12-months we think this cap removes almost completely the risk of cost over runs (and CVN having to contribute to the well cost).
Valuation and Target Price
We are reducing our target price on CVN to 18cps from 28cps.
After the sale of the remaining 20% of the Thai production assets in February CVN had A$108m in cash or 10.4cps.
The Company has advised that it will spend circa $8-10m on 3D seismic this year reducing cash to A$98m or 9.5cps.
Based on what the market is prepared to pay for early stage exploration success (FAR provides a good reference point) we value the 2C resource (Phoenix South / Phoenix) at US$5/bbl or A$41m (3.9cps).
We value Roc and the other prospects and leads at A$24m or 2.3cps. Assuming flow rates can be maintained in Thailand at around 4,000-5,000boe/d then we think the CVN royalty stream is worth 2.4cps.
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