resources carnarvon petroleum ltd

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Carnarvon Petroleum Ltd Year End 30 JuneShare Price $0.38 A$/sh Issued Capital FP Ord 1,189.9 mOpt @ var prices 1.0 mRights @ var prices - mTotal Dil. FPOrd 1,190.9 m Market Capitalisation $452 mEnterprise Value $400 mDebt $- mCash $50 m

DirectorsChair P LeonhardtMD A CookNE Dir W FosterNE Dir P Moore

ShareholdersMgmt ~6%

Company Details76 Kings Park rdWest Perth, 6005Western AustraliaTelephone: +61 8 9321 2665Facsimile: +61 8 9321 8867www.carnarvon.com.au

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Disclaimer

Euroz Securities declares that it has acted as underwriter to and/or arranged an equity issue in and/or provided corporate advice to Carnarvon Petroleum Ltd during the last year. Euroz Securi-ties has received a fee for these services.

Analyst Date Price TargetJon Bishop 23rd August 2018 $1.00/sh

STO Purchase Quadrant Energy – No Change to Valuation, Price Target or Recommendation

Investment case

STO has announced that it has agreed to purchase 100% of Quadrant Energy for US$2.15Bn. An additional ‘contingency payment’ has been apparently appended to the transaction to preserve participation of the vendor in any upside from the Dorado and broader Bed-out Sub-Basin interests, crystallised via additional discovery, appraisal and development of existing and future resources, in addition to the embedded consideration for the Bed-out assets within the upfront consideration. Whilst direct look-through for CVN is not immediately apparent, a number of circumstantial data points leads us to posit that substantial value has been ascribed to the Dorado and broader basin prospectivity within the total consideration. We remain convicted on the intrinsic value of the Dorado discovery but moreover the value implications for the broader Bed-out Basin portfolio as a consequence. Market metrics, transaction analysis and preliminary DCF valuation of a potential development of at least Dorado reinforces our estimates of CVN’s asset valuation. Dorado and the broader Triassic play fairway is one of the best discoveries ever made in Australia and CVN own 20-30% with a commercially motivated JV partner: Buy.

Key pointsyy STO has announced that it has agreed to purchase 100% of Quadrant Energy

for US$2.15Bn (A$2.95Bn);

yy Additional ‘contingent payments’ have been included as apparently an addenda to the up-front consideration relating specifically to development progress at Dorado;

yy STO has clearly identified Dorado and the broader Bed-out Sub-Basin as growth hub:

yο Dorado appraisal via 2 wells next CY;

yο FEED in 2020;

yο 4 high grade Dorado style prospects to gross up development scale;

yο Opportunities to advance development of the discovered and future gas-liquids resources to bolster their existing WA domgas businesses;

yy We view STO as an excellent JV partner for CVN’s Bed-out interests, noting, that public listing and utilisation of debt to transact on Quadrant will motivate rapid development of discovered resources, particularly the Dorado oil discovery to generate cash to retire debt, add production growth and improve shareholder returns;

yy Our analysis of the STO transaction and circumstantial data points in the public domain reinforce our conviction of the value potential of not just Dorado but all of CVN’s discovered resources and exploration potential;

yy Valuation of $0.94/sh and Price Target of $1.00/sh remain.

Carnarvon Petroleum Ltd(CVN $0.38) Buy

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Analysis

WHAT WE KNOW

yy STO has announced that it has agreed to purchase 100% of Quadrant Energy for US$2.15Bn (A$2.95Bn);

yy Additional ‘contingent payments’ have been included as apparently an addenda to the up-front consideration relating specifically to:

yο Certification of oil and condensation discovered at Dorado meeting a minimum volume hurdle;

yο FID for an oil-condensation development at Dorado;

yο Royalty payments for any future development of hydrocarbons beyond a Dorado oil and condensate development;

yy CVN tabled a maiden estimate of 2C Contingent Resources at the Dorado discovery of 283mmbboe (186mmbbls of oil & condensate) gross; CVN 57mmbboe net;

yy This is the 3rd largest oil discovery on the NWS so far:

yy When Apache sold the Quadrant assets in 2015 for US$2.10Bn the assets boasted ~323.4mmbboe of 2P Reserves (83% gas);

yy STO is purchasing these assets 3yrs later for US$2.15Bn this time with 220mmbboe 2P Reserves (85% gas);

yy In this time:

yο Oil prices have risen;

yο WA domgas gas prices have been largely flat; and

yο Currency has fallen ~US4c;

yy 2016 regulatory filings by Quadrant Energy identify +$1Bn in restoration provisions;

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yy At the point of the Apache sale to Quadrant in April 2015, KAR.ASX waived a pre-emption to purchase Apache’s 50% interest in the outboard WA-482-P for US$241m (per asset carrying value as at Oct 2014 – refer ASX release DD 01/07/2015):

Source: KAR.ASX Company release – DD: 01/07/2015

yy FAR.ASX as CVN’s nearest proxy, has:

yο A market cap of $683m, $630m EV;

yο 15% interest (pre-Govt carry) in 641mmbbls 2C gross for SNE development (NB: we do not view Fan 2C resources to be economic due to Net:Gross, reservoir thickness; volumes; and water depths);

yο Circa 70mmbbls net after Govt carry = A$9/bbl EV:2C;

yο Senegal in water depths of ~1,000m;

yο FAR in arbitration with JVP Woodside (WPL.ASX);

yο Development comprises: 100kbbls FPSO; Field life capex of US$8Bn; opex+lease of US$10-14/bbl;

yy CVN has:

yο A market cap of ~$430m, $380m EV;

yο 2C Resources of 57mmbbls of oil and condensate plus ~20mmbboe gas plus 31mmbbls at Buffalo;

yο EV:2C of A$6.70/bbl on just oil-condensate or $5/boe for Bed-out 2C resources;

yο NWS Australia in water depths of <100m;

yο Simple JV with STO (motivated to commercialise growth assets, particularly oil but also the gas for the domgas WA business and contracts);

yο Development comprises: 100kbbls FPSO; Field life capex of US$1-1.5Bn; opex+lease of A$20/bbl; generates free cash margin after tax and PRRT (pre-credits) of +A$35/bbl at spot.

WHAT WE THINK

yy The Quadrant IPO-trade sale process started in late 2017;

yy Industry independent analysis ascribed circa A$2Bn of asset value to the Quadrant portfolio at this time;

yy The Quadrant-STO transaction was months in the making, with the upfront consideration initially determined before the successful Dorado discovery;

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yy The Dorado discovery and broader basin was a key tenet within the transaction, evident within the conference call and presentation accompanying the announcement, proposing:

yο 2 well Dorado appraisal campaign in 2019;

yο Front End Engineering Design (“FEED”) in 2020;

yο At least 4 high grade drill ready prospects to potential boost scale of Dorado-Phoenix development hub(s):

Source: STO.ASX Company release – DD: 22/08/2018

yy Highlighting the $1Bn in restoration provisions, independent assessment of Quadrant portfolio value pre-STO deal and the look-through value of exploration of US$214m paid for outboard exploration licenses with KAR pre the Levett-1 exploration well (P&A with oil shows), implies to us that a considerable additional consideration was added to the initial agreed upfront payment prior to the Dorado discovery.

Potential Valuation Implications

The STO transaction has strengthened our conviction for the quality of the Dorado discovery and the broader Bedout Sub-Basin potential.

Transaction metrics support a look-through valuation potential closely aligned with our existing SOTP valuation of $0.94/sh.

Moreover, it introduces a quality NWS operator, with experience in shallow NWS light oil, FPSO developments (Mutineer-Exeter, Fletcher-Finucane).

The nature of Dorado as large oil discovery and the debt financing of the Quadrant acquisition encourage us to believe that STO will expedite commercialisation of (at least) the Dorado development and likely the gas-condensate resources discovered.

A review of possible relevant valuation methodologies to apply to CVN, using various data points, are built-up below:

1) STO-Quadrant deal

On our analysis the STO transaction supports a valuation on just the contingency payment of +29cps ie 13cps pre-Dorado discovery plus the 16cps assuming the 186mmbbls of 2C CVN tabled;

We would then argue there is up to 30cps of potential upfront value paid for the Bed-out interests as a consequence of the Dorado discovery ie $2.2Bn independent valuation less $1Bn restoration liabilities = $1.2Bn for assets pre-Dorado discovery;

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Grossed up = ~US$240m implied for CVN’s (at least) 20% interest or $325m (27cps)

Thus 27cps plus 16cps contingency value plus 13cps pre-Dorado EV and cash for the existing portfolio = 56cps;

2) In-ground (A$/bbl) Metrics

The STO deal break-down compares favourably to our $20/bbl in-ground 2C recoverable metric for 57cps for just Dorado;

This is back-up by looking at back of the envelope free cash margin at spot oil prices:

yy A$100/bbl spot oil price at USD0.73 forex

yy Less – Opex+lease of A$20/bbl

yy Less – Capex of A$5.50-8.00/bbl

yy Less – 40% PRRT (not inc. credits or future capex-opex offsets);

yy Less – 30% Corporate tax

yy Equals - +$30/bbl free cash margin

yy Therefore hugely robust at considerably lower oil prices.

Or alternatively, look at a Dorado Project NPV on a 100kbbls/d FPSO development of the 2C Resource of 172mmbbls gross for 10yrs operating life, using the inputs listed above we determine an NPV10 of $1,183m net to CVN unfinanced.

On 34mmbbls net 2C, this equates to A$34/bbl on our oil price assumptions ie US$80/bbl long term from CY’21.

3) Peer (A$/bbl) Metrics

Our assessment of just Dorado value potential is reinforced by the market metric applied to just the net 37mmbbls Dorado 2C liquids at FAR comp of A$9/bbl = 28cps plus the 13cps ascribed EV and cash pre-discovery = 41cps

yy Therefore we maintain our Valuation of $0.94/sh:

ASSET VALUATION

A$m A$/sh

Dorado (34mmbbls net est.) 684 0.57

Phoenix-Roc (20mmbboe 2C net) 100 0.08

Baxter (23mmbboe 2C net) 115 0.10

Buffalo (risked to 10%) 33 0.03

Exploration - other 150 0.13

Corporate (14) (0.01)

Unpaid Capital 0 0.00

Debt - -

Cash est. 50 0.04

Total 1,118 0.94

yy We see little downside to the current share price as a consequence and contest that CVN will be a target of M&A in the short to medium term. There is clear market precedent of demand for non-op O&G interests:

1. Tap Oil – Risco and Northern Gulf Petroleum;

2. Buru Energy – Fosun;

3. AWE – Mitsui after CERCG, MinRes, Lonestar.

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Key Variables

Euroz Forecast FY'18 FY'19 FY'20 FY'21 FY'22 FY'23

Brent US$/bbl $64 $78 $85 $85 $85 $85

WTI US$/bbl $59 $68 $75 $80 $80 $80

AUDUSD $0.78 $0.76 $0.76 $0.78 $0.78 $0.78

Our Share Price Sensitivity

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Our Market Sensitivity Valuation - $0.94/sh

Price Target - $1.00/sh

Bull Scenario - $2.00/sh

CVN find additional Dorado or sister oil discov-eries. Oil prices continue to rise beyond our long term U$80/bbl WTI forecast from 2022. High oil price attracts greater opportunistic interest for JV farm-in and debt funding, enabling project development of Buffalo and Labrynth prospects.

Base Scenario - $1.00/sh

Oil prices trend gradually towards our long term oil price assumption of US$80/bbl from 2022. CVN have leveraged themselves by exploring undeveloped oil prospects and readying them for M&A opportunities.

Bear Scenario - $0.50/sh

Oil prices fall to below US$50/bbl over the medi-um to long term. Funding for prospect develop-ment diminishes. Projects remain idle.

Company SummaryCarnarvon Petroleum Ltd (CVN) is an oil and gas exploration and development company. CVN has secured multiple assets and arceage on the North West Shelf, developing with the aim to attract farm-in or acquisitions.

Drilling campaigns of Phoenix Sth-3 and Dorado-1 represent near-term catalysts for CVN to trade upwards.

DisclaimerThe projections and information above is based on the set assumptions outlined. Due care and attention has been used in the preparation of this information. However actual results may vary from forecasts and any variation may be materially positive or negative. Forecasts by their very nature, are subject to uncertainty and con-tingencies, many of which are outside the control of Euroz.


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