A Busy Few Months - Carnarvon Petroleum...Hartleys Limited (CVN)Carnarvon Petroleum Ltd 23 March 2018 Page 3 of 19 HIGHLIGHTS It has been a busy few months for the gas sector in Western

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Carnarvon Petroleum Ltd (CVN)

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$0.13

$0.25

Brief Business Description:

Hartleys Brief Investment Conclusion

Chairman & CEO:

Adrian Cook CEO

Peter Leonhardt Chairman

Substantial Shareholders:

None

Company Address:

Valuation:

Issued Capital: 1029.6m

- fully diluted 1030.6m

Market Cap: $133.8m

- fully diluted $134.0m

Current Debt

Current Cash $38.6m

EV $95.3m

Valuation Summary $m $ps

Discovered 127 0.12

Exploration 88 0.11

Thai Royalty Stream 0 0.00

Cash, less 1-yr spend 11 0.01

Sub total 226 0.25

Source: Hartleys Research

Authors:

Aiden Bradley

Industrials & Energy Analyst

Ph: +61 8 9268 2876

E: [email protected]

$0.0m

CVN.asxSpeculative Buy

23 Mar 2018

Share Price:

12mth Price Target:

Oil and gas explorer with assets in

Australia

Carnarvon Petroleum (CVN) is a

conventional oil & gas explorer with key

assets off-shore north-west Australia. The

company and its JV partner(s) have drilled

4 out of 4 successful E&A wells in the

Greater Phoenix area (CVN 20% interest).

Level 2, 76 Kings Park Road, Perth, WA

CARNARVON PETROLEUM LTD (CVN)

A Busy Few Months It has been a busy few months for the gas sector in Western Australia with a

series of domestic and LNG focused asset and corporate transactions and

the drilling or planned drilling of a number of very high-profile wells. CVN will

play its part in this developing landscape with the imminent drilling of the

Phoenix South-3 well. On the M&A front, we have seen a number of deals

targeting both the current demand for gas onshore WA from the mining sector

and larger players starting to position themselves offshore for the next wave

of LNG contracting (mid next decade).

Key News flow overview and implications for CVN

We review recent news flow related to CVN and WA Gas. CVN has

announced that the GSF Development Driller-1 semi-submersible drilling rig

has commenced the final leg of its journey to drill the Phoenix South-3 well

(CVN 20%). After a minor (towing) delay the rig is now expected to be on

location in late March, with the well drilled in April. AWE has recommended a

takeover bid from Mitsui valuing the Company at circa $600m, leaving CVN

as potentially the largest independent holder of uncontracted gas in WA

(subject to appraisal). WPL has acquired a further stake in the Scarborough

Gas Field, kicking off the start of deal activity in preparation for the next wave

of LNG contracting. Western Gas acquires Equus from Hess, a potential

competitive source of gas for the domestic market, but more likely we believe

to be tied into an existing LNG project. Since the publication of our research

note ‘Mining for Gas in the Bedout Sub-basin’ (12 Apr 2017) (we outlined the

strong argument for a gas pipeline to be built connecting WA to the Eastern

States), it has been discussed widely in the press and received the strong

support of a former Premier of WA, culminating in the Federal government

commissioning GHD and ACIL Allen to carry out a pre-feasibility study on a

transcontinental pipeline. The study is due to be completed in March 2018. If

it was built it would obviously deepen the available market for upstream

operators with uncontracted gas (who no longer would have to rely on the

relatively small WA domestic market). Finally, Australia and Timor-Leste have

signed a new Maritime Boundary Treaty. CVN’s Buffalo Project (CVN 100%,

WA-523-P) has also been affected by the boundary change. The Buffalo oil

field will now fall within Timor-Leste’s exclusive jurisdiction. Given its relative

greater importance to Timor-Leste (compared to Australia) we would expect

CVN to receive significant local support to pursue its exploitation.

Investment View – A Top Pick for 2018 - Speculative Buy The imminent appraisal of Phoenix South and the drilling of Dorado-1 could

result in CVN being one of the better performers in the oil sector in 2018.

CVN’s potential exposure to a recovering oil price is also possibly

underappreciated, with Phoenix South potentially having a very high liquids

content. Post the acquisition of AWE, a successful appraisal of Phoenix-

South will also likely attract takeover interest, with CVN post appraisal

success being one of the largest independent holders of of uncontracted gas

in Western Australia. We rate CVN a Speculative Buy based on this

combination of an attractive valuation (low EV/boe), newsflow,

(unrecognised) oil price leverage and takeover appeal.

Hartleys Limited ABN 33 104 195 057 (AFSL 230052) 141 St Georges Terrace, Perth, Western Australia, 6000

Hartleys does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the

firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single

factor in making their investment decision. Further information concerning Hartleys’ regulatory disclosures can be found on Hartleys

website www.hartleys.com.au

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

0.16

.

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

Mar-18Nov-17Aug-17Apr-17

Volume - RHS

CVN Shareprice - LHS

Sector (S&P/ASX 200 Energy) - LHS

A$ M

Carnarvon Petroleum

Source: IRESS

http://www.hartleys.com.au/

Hartleys Limited Carnarvon Petroleum Ltd (CVN) 23 March 2018

Page 2 of 19

SUMMARY MODEL

Carnarvon Petroleum Share Price CVN.asx

CVN $0.13 Speculative Buy

Key Market Information Directors

Share Price $0.13 Peter Leonhardt Chairman

Market Capitalisation $134m Adrian Cook Managing Director

Current Cash est. (ex-royalty) $39m Bill Foster Non-executive Director

Issued Capital 1029.6m Dr Peter Moore Non-executive Director

ITM options 0.0m

Options 1.0m

Issued Capital (fully diluted ITM options) 1030.6m Substantial Shareholders

Issued Capital (fully diluted all options) 1030.6m

EV $95.3m No substantial shareholders

12Mth Price Target $0.25 Investment Summary

Projects Project Operator CVN Interest

WA-435-P Greater Phoenix Quadrant Energy 20%




WA-521-P Greater Phoenix CVN 100%

WA-523-P Buffalo CVN 100%

WA-524-P Maracas CVN 100% Expected News flow

WA-155-P(1) Outtrim East CVN 28.5%

EP-490 Cerberus CVN 100% Apr-18 Phoenix South-3 w ell

EP-491 Cerberus CVN 100% May-18 Dorado-1 w ell

EP-475 Cerberus CVN 100% 1H18 Labyrinth Farm Out commenced February

TP/27 Cerberus CVN 100% Mid 2018 Condor Farm Out commencing

AC/P62 Condor CVN 100% 2018 Farm Out Outtrim (post Sw ell-1 result)

EP-497 Santa Cruz CVN 100%

Quarterly Cash Flow

3Q 4Q 1Q 2Q

Cash (Beginning) 59.9 51.1 53.0 50.0

A$ m

Valuation Summary Operating Cash f low 0.0 0.0 0.0 0.0

A$ m Ac/share Exploration / Development -4.1 -1.1 -1.3 -1.1

Phoenix/South Phoenix/Roc Liquids 0 0.00 Corporate overheads -0.8 -0.6 -0.9 -0.7

Phoenix/South Phoenix/Roc Gas 122 0.12 Other -3.9 3.6 -0.9 0.3

Other discovered 5 0.01

Exploration 88 0.11 Cash (End) 51.1 53.0 50.0 48.5

Farm Outs 0 0.00

Post Asset Sale Cont. Payments 0 0.00



Sub-total 226 0.25

Analyst: Aiden Bradley

Phone: 618 9268 2876

Sources: IRESS, Company Information, Hartleys Research

Last Updated: 23/03/2018

Carnarvon Petroleum ( CVN) is a conventional oil & gas

explorer w ith key assets off-shore north-w est Australia.

The company and its JV partner(s) have drilled 4 out of 4

successful E&A w ells in the Greater Phoenix area (CVN

20% interest). The discovered resource now exceeds

economic threshold levels (subject to South Phoenix

testing). Very large follow up targets such as Dorado-1

could add considerably to scale of the development.

FY17 FY18


Page 3 of 19

HIGHLIGHTS It has been a busy few months for the gas sector in Western Australia with a series of

domestic and LNG focused asset and corporate transactions and the drilling or

planned drilling of a number of very high-profile wells. CVN will play its part in this

developing landscape with the imminent drilling of the Phoenix South-3 well.

On the M&A front, we have seen a number of deals targeting both the current demand

for gas onshore WA from the mining sector and larger players starting to position

themselves offshore for the next wave of LNG contracting (mid next decade).

1: AWE has recommended a takeover bid from Mitsui valuing the Company at

circa $600m.

Fig. 1: AWE bid premium

Source: AWE

AWE’s key asset is the Waitsia dry gas field in the Perth Basin (AWE 50%). Waitsia’s

2P reserves are currently 820PJ (Gross).

Fig. 2: AWE 2P Reserves

Source: AWE


Page 4 of 19

The Mitsui bid valued AWE’s 2P reserves at circa A$8/boe, with almost 80% of its 2P

reserves undeveloped.

Fig. 3: EV/2P Multiples vs % of 2P Developed

Source: Grant Thorton

Implications for CVN: If Phoenix South-3 comes in as expected, the total net

discovered resource (including Roc) for CVN would be close to 40mmboe. While this

resource would initially be 2C and obviously all undeveloped, even assuming a

A$4/boe multiple, would imply a valuation of A$160m or 15.5c per share (19c including

net cash).

Fig. 4: Phoenix South-3 and Dorado resource potential

Source: CVN

2: Woodside (WPL) has acquired a further stake in the Scarborough Gas Field.

Woodside Petroleum in February acquired a further 50% in the Scarborough Gas field

(WA-1-R) from Exxon Mobil. Woodside now with 75% (BHHP 25%) has assumed

operatorship.

WPL is proposing to develop the Scarborough resource through 12 subsea, high-rate

gas wells tied back to a semi-submersible platform moored in 900m of water. The 7.3

Tcf (100%) of dry gas (2C) is expected to be piped circa 400km to the Woodside

operated Pluto LNG facility.


Page 5 of 19

The project is expected to cost US$8.5-9.7bn (100%) in total (Upstream: US$6.0bn

Downstream: US$2.5 – $3.7bn). These estimates include a 25% contingency with pre-

final investment decision activities expected to cost approximately US$0.5 billion.

Fig. 5: Scarborough Upstream Concept Schematic

Source: Woodside

The onshore development concept is a brownfield expansion of the existing Woodside

operated Pluto LNG facility. Studies have commenced on a potential Pluto–NWS

Interconnector, intended to unlock incremental value for both Pluto LNG and the North

West Shelf Project. Feasibility studies on a 0.7 to 3.3mtpa second LNG train at Pluto

were concluded in 2017.

Woodside, is the operator of Pluto, with a 90% interest, other current partners are

Tokyo Gas and Kansai Electric with 5% each. This deal we expect is Woodside

positioning itself for the next wave of LNG contracting (with Japan), with the first deals

likely to be signed early next decade for first delivery from 2025 (when existing

contracts start to expire).

Fig. 6: Japanese LNG demand versus contracted volume

Source: Platts Analytics’ Eclipse Energy, Japan’s Ministry of Finance


Page 6 of 19

In the next wave of LNG contracting we expect WA’s LNG operators to pursue the

cheaper option of brownfield expansions, especially given the spare capacity that will

exist at existing facilities from 2025.

Fig. 7: LNG Plant Spare Capacity as plants come off plateau

production

Source: Wood Mackenzie

We expect the Woodside Scarborough deals not to be the last as operators jostle for

competitive position and to re-arrange the current misalignments between the various

downstream and upstream stakeholders.

Woodside is also proposing piping Browse gas to the North West Shelf (NWS). It is

therefore feasible that it seeks further deals that more closely align Scarborough to

Pluto and Browse to NWS upstream and downstream partners.

At the moment the Scarborough JV is owned by WPL 75% and BHPP 25%, while the

Pluto plant is WPL 90% and Tokyo Gas and Kansai Electric with 5% each. BHP has

the option to acquire an additional 10% interest in Scarborough up until December 31,

2019.

Similarly, Woodside’s participating interest in the Browse resources is 30.6%, with

Shell owning 27%, BP 17.33%. Japan Australia LNG (MIMI Browse) 14.40%, and

PetroChina a 10.67% stake.

The NWS JV in comparison is Woodside (16.67%), BHP (16.67%), BP (16.67%),

Chevron (16.67%), MIMI (16.67%) and Shell (16.67%).

So, one obvious deal would be for BHP to swap its stake in the NWS with Woodside

for a share in Pluto.

Implications for CVN: LNG export projects in WA are required (if economically viable)

to sell 15% of their reserves into the domestic market.


Page 7 of 19

Fig. 8: WA Domestic Gas Policy – long-term contractual

arrangements with WA Government

Source: Source: DJTSI 2017. “Western Australian Domestic Gas Policy – Implementation Update”, 12

September, circulated to the WA Gas Consultative Forum. Reserves estimates and LNG facility capacity

figures are sourced from Wood Mackenzie. a Indicative commitment based on annual LNG production.

Currently, there is no domestic gas production infrastructure in place. b Excludes domestic gas to be

supplied by the North West Shelf under contracts struck prior to their 2015 agreement and any third-party

tolling.

Therefore, the timing and rate of LNG developments has a major bearing on available

domestic supply.

Fig. 9: Indicative Gas Availability and Market Outlook (TJ/day),

2018-37

Source: DJTSI 2017. “Western Australian Domestic Gas Policy – Implementation Update”, 12 September,

circulated to the WA Gas Consultative Forum.

With average contract prices in WA impacted by the periods when domestic supply

from LNG projects is available (lower prices) and not (higher prices required for other

non-subsidised sources of gas). As outlined earlier we have entered a period when

available LNG project supply has already been contracted, so any customers requiring

gas in the next 6-8 years will need to source it from non-LNG projects. A potential

window of opportunity for domestic producers with uncontracted gas, which explains

the broad interest from various parties in acquiring AWE. CVN with success at Phoenix

South-3 will along with Western Gas now be one of only two independent operators

with ‘significant proven uncontracted’ gas in WA.


Page 8 of 19

Fig. 10: Western Australian domestic gas processing capacity,

consumption and prices

Source: APPEA, BREE, GoWA, SKM

3: Western Gas acquires Equus from Hess

We have long felt that a successful appraisal of Phoenix-South will likely attract

takeover interest in CVN. As we highlighted in our note ‘Mining for Gas in the Bedout

Sub-basin (12 April 2017)’, post its drilling success to date, CVN along with AWE

(AWE.asx) was one of two largest ‘independent’ owners of uncontracted gas in

Western Australia. Having retained the rights to market the gas independently, this

would make them an appealing target for a number of large domestic gas users. Add

in a continued medium-term gas shortage in WA and a very high liquids content in the

Bedout Sub-basin, the takeover potential is compelling (especially for a mid to large

mining operation).

Post the takeover of AWE, CVN looked like being the only independent left with

potential access to material volumes of commercial gas. A new company, Western

Gas, has however acquired the Equus Gas Field from Hess Corporation (HES.nyse).

The Equus project comprising 11 gas and condensate fields in the Carnarvon Basin,

about 200 kilometres north-west of Onslow in Western Australia.

These fields contain an independently certified resource of more than two trillion cubic

feet (2 Tcf) of gas and 42 million barrels of condensate. However, we believe that the

four largest fields (70% of reserves) would be of sufficient size to supply an existing

gas plant, substantially improving the potential economics of any proposed

development.

This downsized (versus prior Hess proposals) could produce between 150 million and

250 million cubic feet of gas a day from the offshore fields, with condensates

processed at a production ship, while gas would be piped about 220 kilometres to

shore through a new pipeline costing about $US500 million.

Implications for CVN: While we feel that Equus is an alternative for domestic gas

supply, in terms of timing it sits behind Waitsia in the queue to market and likely behind

Phoenix South assuming PS-3 is a success (due to the high liquids content and


Page 9 of 19

cheaper development cost). As a result, given its relative proximity to Woodside

Petroleum's Scarborough gas field, we feel that Equus is still likely to be developed as

part of any Scarborough to Pluto LNG development (it may even be the domestic

component of that project).

Fig. 11: Equus Gas Project

Source: Western Gas

4: Gas Pipe to the East

In our research note ‘Mining for Gas in the Bedout Sub-basin’ (12 Apr 2017) we

outlined the strong case for a gas pipeline to be built connecting the undeveloped

gas resources in WA to the consumer demand in the Eastern States.

Since then the case for just such a pipeline has been widely reported in the press, has

received the strong support of a former Premier of WA, culminating in the Federal

government commissioning GHD and ACIL Allen to carry out a pre-feasibility study on

a transcontinental pipeline. The study is due to be completed in March 2018.

Our own version of a West-East pipeline would seem to be a win-win for all concerned:

WA State Government – would benefit from increased gas development activity and

a boost to WA Economic activity through increased availability of gas.

WA gas consumers – do not have to lose out, in fact they would likely gain. They would

be able to bid for gas at East Coast prices minus the pipeline tariff. As part of building

the pipeline, offshore retention lease terms would have to be tightened so that

operators could not blame a lack of commercial opportunity for not developing gas

fields. Use it or lose it would have to be strictly enforced.

WA gas operators – those that simply want to hold the gas in the ground waiting for

the once every 15-20 years Japanese fed LNG contracting boom may be

disappointed. The pipeline would open up East Coast gas markets (in addition to WA

domestic and LNG export) as another viable commercial alternative. We have

assumed a well head price of $5/GJ in our modelling, which is pretty close to the LNG

netback price assuming a US$55-60/bbl oil price. So not the super returns expected


Page 10 of 19

to be achieved during the once every two decades Japanese LNG buying frenzy (they

can still be captured at those times) but a reasonable return all the same.

Federal Government – would help solve the East Coast gas supply crisis and generate

an adequate return on the pipeline through increased offshore production and related

taxes and a boost to National GDP from increased gas availability for industry. An

additional benefit is that it would bring forward the development of WA’s offshore gas

reserves. A reserve that may be under threat from rapid developments in renewable

energy technology, and as a result in 15-20 years facing the possibility that the market

for such gas may have diminished or disappeared, and it becomes a stranded

resource (some in the oil and gas industry may view this as unlikely but given the pace

of developments in the renewable sector, it has to be a consideration).

Implications for CVN: The argument in favour of a West-East pipeline does seem

quite compelling. If it was built it would obviously deepen the available market for

upstream operators with uncontracted gas (who no longer would have to rely on the

relatively small WA domestic market). In the meantime, any major gas consumers

wanting to make sure they are not disadvantaged by the continued gas shortages in

WA and now the East Coast Australia, have no choice but to either compete for what

3rd party gas is available in the market or be more proactive and go now and acquire

their own upstream production. This stark choice facing gas users brings us back to

CVN and underpins our positive outlook for the company.

Fig. 12: Delivered cost of WA offshore gas to the East Coast


5: Australian and Timor-Leste sign a new Maritime Boundary Treaty.

The Australian and Timor-Leste Governments have signed a new Maritime Boundary

Treaty. While the treaty settles the sea border dispute, the disagreement over how to

share the potentially lucrative Sunrise gas field is ongoing.

For the Sunrise gas field, Australia has offered to share profits 80-20 in Timor Leste's

favour, but with the oil and gas processed in Darwin. Timor Leste wants a 70-30 split

but with processing done in its own country to encourage the growth of a domestic

processing industry.


Page 11 of 19

Implications for CVN: CVN’s Buffalo Project (CVN 100%, WA-523-P) has also been

affected by the boundary change.

The Buffalo oil field will now fall within Timor-Leste’s exclusive jurisdiction (refer Figure

13) while a portion of WA-523-P will remain within Australia’s exclusive jurisdiction.

Fig. 13: Maritime Boundary Change relative to WA-523-P


The signing of the new Maritime Boundary Treaty will require CVN to secure a PSC

from Timor-Leste. Given its relative greater importance to Timor-Leste (compared to

Australia) we would expect CVN to receive significant local support to pursue its

exploitation.

CVN believes that the Buffalo Field contains 31mmbo recoverable (RISC audited 2C

resource), sweeping oil from the unproduced structural attics. Any future development

would likely cost just US$150m, replicating previous facilities, with operating costs

expected to be US$80m to $100m p.a. based on 4-year production life.

The utilisation of modern technology has enabled the identification of the unproduced

oil in this high-quality reservoir, where in the original development the initial production

from two wells was around 50,000 bopd. The original Buffalo Project was still

producing 4,000 bopd when production ceased. The recent recovery in oil prices has

obviously also provided support for any future commercial redevelopment of this

project.


Page 12 of 19

Fig. 14: Buffalo Structural Attics


6: Last and most importantly, the GSF Development Driller-1 rig is on its way.

CVN has announced that the GSF Development Driller-1 semi-submersible drilling rig

has commenced the final leg of its journey to drill the Phoenix South-3 well (CVN

20%). After a minor (towing) delay the rig is now expected to be on location in late

March, with the well drilled in April.

The well is expected to take 90 days to a target depth of 5,156m, 65 days to the top

of the reservoir.

https://www.marinetraffic.com/en/ais/details/ships/shipid:738470/mmsi:538007686/v

essel:GSF%20DEVELOPMENT%20DRILLER%20I

Phoenix South-3 well is only circa 560 metres from the Phoenix South-2 gas and

condensate discovery and will target an estimated gross mean recoverable

prospective resource of 489 Bscf of gas and 57 million barrels of associated

condensate.

The Phoenix South-3 well will be followed up by the drilling of the Dorado prospect in

May. The Jack-up rig contract (ENSCO 107) for Dorado-1 (CVN 20%) well has also

been signed with drilling expected to commence in May 2018 (45 days to target depth

of 4,400m, 35 days to the top of the primary reservoir).

The Company also seems to be adequately funded for this programme with CVN

recently releasing its December 2017 Quarterly report, ending the year with $48.49m

of net cash (versus $50m prior). Estimated cash outflow for the current quarter is

$9.86m.

https://www.marinetraffic.com/en/ais/details/ships/shipid:738470/mmsi:538007686/vessel:GSF%20DEVELOPMENT%20DRILLER%20I

https://www.marinetraffic.com/en/ais/details/ships/shipid:738470/mmsi:538007686/vessel:GSF%20DEVELOPMENT%20DRILLER%20I


Page 13 of 19

Fig. 15: Phoenix South-3 and Dorado resource potential

Source: CVN

Fig. 16: CVN Asset Portfolio

Source: CVN


Page 14 of 19

INVESTMENT VIEW – A TOP PICK

FOR 2018 The delay in drilling the Dorado-1 well (from 2H17 to 1H18) impacted the price

performance of CVN in 2017. However, the appraisal of Phoenix South and confirmed

drilling of Dorado-1 should result in CVN being one of the better performers in the oil

sector in 2018.

CVN’s potential exposure to a recovering oil price is also possibly underappreciated.

Phoenix South looks likely to have a very high liquids content.

Discoveries to date in the Roebuck Sub-Basin (especially Phoenix South Caley) have

contained a very high liquids content and is a potential game changer in terms of the

economics of any potential development in the sub-basin and a huge differentiator in

comparison to the investment returns from a dry gas field such as the developed

(similarly sized) Reindeer Field.

Fig. 17: Liquids content Phoenix/South Phoenix and Roc


In fact, the liquids component could be so high that the liquids cash flow would come

close to paying for the whole development (the gas gets produced for free!).

Fig. 18: NPV10 of Liquids only at various oil prices (P/PS/Roc

development)


We continue to believe as outlined before that the market has applied a discount to

CVN due to the perception it is a dry gas play and that any commercialisation will likely

($150.00)

($100.00)

($50.00)

$0.00

$50.00

$100.00

40 50 60 70 80

A$

m

US$/bbl


Page 15 of 19

be hostage to Quadrant’s broader portfolio requirements. We believe the risk from the

latter is also overstated and these misconceptions make for an appealing investment

opportunity.

Quadrant requires the gas to be developed: CVN is indeed a smallish minority

partner (20%) in a JV with the dominant (non-LNG) gas producer in WA, Quadrant

Energy. There may be concerns that CVN will become hostage to Quadrant’s broader

development plans and the Bedout Sub-basin discoveries are pushed down the

development queue. However, a number of key projects underpinning Quadrant’s

existing reserves and supply contracts are set to deplete middle of next decade and

its recent exploration efforts have had mixed success. In fact, the Bedout Sub-basin

has the potential to be the foundation asset* for Quadrant’s ongoing supply efforts

next decade (*requires proving up of Caley resource in South Phoenix and/or Dorado

discovery to place it top of the development queue).

Liquids component is the game changer: In the following chart, we highlight the

implied acquisition gas price to a potential acquirer at various cash payments to CVN

for its stake in Roc/Phoenix and South Phoenix only (assumes liquids content as

before covers cost of development – i.e. NPV10 close to zero at a US$60/bbl long run

oil price). The implied price of the gas would obviously fall or rise if oil prices are above

or below US$60/bbl respectively, and/or the actual cost of funding the development is

below or above the standardised 10% we used in our modelling.

Fig. 19: NPV10 of CVN’s ‘free gas’ at various transaction prices


Most mid to large gas users (or potential users as gas has not been easily accessible)

in WA would jump over backwards to secure potentially 200bcf of gas at a price sub

$3/GJ. However, that is exactly what you get in CVN if you pay <$250m or less (subject

to Phoenix South-3 proving the recoverable gas and condensate as outlined in Figures

4 and 17). In our valuation of CVN we assume acquisition interest at the attractive

implied price of $1.50/GJ level, this would likely rise post a successful appraisal with

South Phoenix-3. CVN’s gas is also ideally located to supply this low-cost gas to

existing customers at Karratha or Port Headland or supply new customers as far north

as Broome.


Page 16 of 19

Fig. 20: Commercialization options

Source: CVN

This valuation alone excludes other exploration potential in the Bedout Sub-basin

(including the large Dorado prospect) and play fairway extension into the Rowley Sub-

basin (which we remain more sceptical on). Beyond the Roebuck Basin, CVN has

used its experience here to build a portfolio of interesting potential farm out

opportunities. While a gas consumer may not be interested in the exploration portfolio,

it is potential additional value we believe is also not captured in the current CVN share

price.

Fig. 21: CVN Valuation


Valuation Summary

Asset Type W.I. Gross Net NPV/boe

mmboe mmboe US$/bbl A$m A$/share

Phoenix South / Phoenix / Roc Liquids 20% 118 24 0.0 0 0.00

Phoenix South / Phoenix / Roc Gas 20% 199 40 2.4 122 0.12

Other discovered 5 0.01

Exploration 818 164 0.4 88 0.11

Farm outs (Maracas, Buffalo, Cerberus, WA-521-P (all 100%)) 0 0.00

Post Asset Sale Contingency Payments 0 0.00



226 0.25

Net Risked Value


Page 17 of 19

Conclusion

To date we believe the market continues to value CVN as a dry gas play, with

commercialisation hostage to Quadrant’s broader portfolio requirements. This is

incorrect and makes for an appealing investment opportunity.

In our valuation of 25c per share for CVN we make the following assumption;

Successful appraisal of Phoenix South with the PS-3 well.

Larger gas users recognise the obvious potential in the Roc/Phoenix/Phoenix

South discovery through CVN retaining the marketing rights to the gas and

the high liquids content subsidising the full field development (at circa

US$60/bbl oil).

Gas user acquires CVN’s 20% stake in these discoveries for an implied gas

price (to them) of A$1.50/GJ. Implies a cash payment to CVN of $122m.

We additionally include very little value for the large identified prospective

resource beyond the Roc/Phoenix and Phoenix South discoveries. We value

this net 164mmboe in the Bedout Sub-basin (now a proven oil and gas play

with prospects such as Dorado on trend and in close proximity to a large

discovered resource) at just $88m.

Finally, we also include no value for potential farm outs of Maraca, Buffalo,

Cerberus and WA-521-P, all have some merit and are currently 100% leased

by CVN.


Page 18 of 19

Fig. 22: Key assumptions and risks for valuation Assumption Risk of not realising

assumption Downside risk to

valuation if assumption is

incorrect

Comment

Commercial development in the Bedout Sub-basin

Low High Post the success of Roc and initial results from Phoenix South we now view a commercial gas development in the Bedout Sub-basin as highly

likely. As a result, we expect there to be significant interest in CVN’s potential 20% stake in the project from a range of large gas users. In

our valuation, we currently assume a conservative $122m valuation based on the likely transaction price a gas user would be

willing to pay.

Successful appraisal of Phoenix South

Low Moderate CVN failed to fully test the Phoenix South Caley reservoir with Phoenix South-2. As a result, a

further well (PS-3) will be required to firm up the resource. While there is some risk associated with every well, the key risk here is that the

prospective resource is not as large as currently predicted by the company. It could in fact turn out to be larger, so there is upside risk as well.

Upside beyond Roc and Phoenix South

Medium Low We have included very little value for upside beyond what we see as the core Roc / Phoenix /

Phoenix South development hub. So, large targets such as Dorado if they fail would

individually have limited impact on our valuation, while offering significant upside in a success

case. We have included zero value for potential farm outs of acreage beyond the Bedout Sub-

basin, although we view these positions as each having merit.

Cash funding adequate Medium Moderate Offshore exploration remains an expensive

business even in this currently deflated oil environment. Wells in the Roebuck Basin for

CVN and its JV partner can cost between US$50-80m gross. CVN had $48.5m in cash at the end of the last quarter, however this could

fall to circa $10m by year end (depending on the drilling programme and insurance payment).

Securing sufficient capital to continue to participate in the JV is a risk but given the

attractiveness of the acreage it is the cost of this capital and not whether CVN can access it that

is the key risk.

Conclusion

We believe that post the drilling results at Roc and Phoenix South, there is likely to be a commercial development in the Bedout Sub-basin. Future testing at Phoenix South and exploration at Dorado will determine the size, timing and value of the development. CVN remains to a certain degree hostage to Quadrants plans for the gas, but we believe it is towards

the top of Quadrants queue to develop. Given the continued gas shortage in WA, we expect a major gas user to be interested in acquiring CVN’s equity interest in the development (when it is adequately de-risked). This will remove any

concerns about how CVN can fund a development.


The key risks for CVN (like most junior oil & gas companies) is a combination of

exploration success and performance of the production assets (if any). Although some

disappointments can be short term and are only a timing issue, other disappointments

can be materially value destructive and can sometimes overhang stocks for a long

period of time. Such disappointments can be very difficult to predict and share price

reactions can be severe and immediate upon disclosure by the company. High

financial leverage would add to the problem. Investing in explorers is very risky given

the value of the company (exploration value) in essence assumes that the market will

recognise a portion of potential value before the results of an exploration program are

known, conscious that the ultimate chance of success is low.

Page 19 of 19

HARTLEYS CORPORATE DIRECTORY Research Trent Barnett Head of Research +61 8 9268 3052

Mike Millikan Resources Analyst +61 8 9268 2805

John Macdonald Resources Analyst +61 8 9268 3020

Paul Howard Resources Analyst +61 8 9268 3045

Aiden Bradley Research Analyst +61 8 9268 2876

Oliver Stevens Research Analyst +61 8 9268 2879

Michael Scantlebury Junior Analyst +61 8 9268 2837

Janine Bell Research Assistant +61 8 9268 2831

Corporate Finance Dale Bryan Director & Head of

Corp Fin.

+61 8 9268 2829

Richard Simpson Director +61 8 9268 2824

Ben Crossing Director +61 8 9268 3047

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Note: personal email addresses of company employees are

structured in the following

manner:[email protected]

Hartleys Recommendation Categories

Buy Share price appreciation anticipated.

Accumulate Share price appreciation anticipated but the risk/reward is

not as attractive as a “Buy”. Alternatively, for the share

price to rise it may be contingent on the outcome of an

uncertain or distant event. Analyst will often indicate a

price level at which it may become a “Buy”.

Neutral Take no action. Upside & downside risk/reward is evenly

balanced.

Reduce /

Take profits

It is anticipated to be unlikely that there will be gains over

the investment time horizon but there is a possibility of

some price weakness over that period.

Sell Significant price depreciation anticipated.

No Rating No recommendation.

Speculative

Buy

Share price could be volatile. While it is anticipated that,

on a risk/reward basis, an investment is attractive, there

is at least one identifiable risk that has a meaningful

possibility of occurring, which, if it did occur, could lead to

significant share price reduction. Consequently, the

investment is considered high risk.

Institutional Sales Carrick Ryan +61 8 9268 2864

Justin Stewart +61 8 9268 3062

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Michael Munro +61 8 9268 2820

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(CEO)

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Jayme Walsh +61 8 9268 2828

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Documents

A Busy Few Months - Carnarvon Petroleum...Hartleys Limited (CVN)Carnarvon Petroleum Ltd 23 March 2018 Page 3 of 19 HIGHLIGHTS It has been a busy few months for the gas sector in Western