Carnarvon last traded at $0.09.
The following is an extract from the report.
Two wells and a $100m in cash
Carnarvon Petroleum Ltd (CVN) is on track to participate in two offshore wells before the end of 2016.
Both wells have a high chance of discovering hydrocarbons and therefore represent catalysts to move the stock price.
The Roc-#2 well has the potential to confirm the minimum economic field size estimate by CVN of 325 Bcf and 17MM bbls of condensate.
Pre-drill estimates suggest the net cost to CVN will be A$21m for both wells. CVN's current cash balance is closer to A$100m or 9.8cps.
We have a Speculative Buy recommendation on CVN with a 12-mnth target price of 16cps.
Outtrim East #1 well - expected to spud in June
The Outtrim East-#1 is expected to spud in mid-June. The well is located 970m east of the Outtrim-#1 well, which discovered oil.
CVN estimate their share of the well cost is A$7m (based on CVN's 28.5% interest in the block).
Drilling is expected to take 25 days on a trouble free basis.
The drilling success rate in this area of the Barrow Sub-Basin has been high however the volumes have been small.
CVN and operator Quadrant believe they have identified a thicker section of the reservoir identified in the Outtrim- #1 well from the reinterpretation of 3D seismic data.
The JV pans to run a full suite of logs in addition to taking fluid and core samples.
The Outtrim-#1 well was drilled by Esso Australia Ltd (Esso) in 1984. The well had a target depth of 1,725m and discovered oil within the late Jurassic sequence.
CVN acquired a 28.5% interest in the permit WA-155-P(1) from Inpex in January 2016.
Roc-#2 - expected to spud in July
CVN expect to spud the Roc-#2 well in July this year. CVN believe Roc-#1 was drilled through the edge of the Roc structure.
Roc-#2 will be drilled through predicted crest of the structure thus testing the extent of the contingent and prospective resource. (2C of 270 bcf and 13MM bbls condensate, Prospective Resource Mid of 193 Bcf and 9MM bbls condensate).
CVN classifies the prospective resource as low risk and places an 80% chance of geological success.
In addition, Roc-#2 will test the Milne sandstone section encountered at the bottom of the Roc-#1 well.
Hydrocarbons were encountered in this section which occurred at TD of Roc-#1. CVN estimate the minimum economic field size for the Roc resource is approximately 325 Bcf and 17MM bbls of condensate.
12-month target price of 16cps
CVN's current cash balance is circa A$100m or 9.8cps.
Within our valuation we only assign value to the cash post the cost of the Outtrim-East #1 and Roc-#2 wells (A$21m).
The balance of our valuation comes from the combined Phoenix South and Roc discoveries.
As with any exploration and appraisal drilling, success may not be achieved. For CVN shareholders, a strong balance sheet provides protection from the vagaries of offshore drilling.
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