Carnarvon Petroleum Limited 25 Nov 09

Success in Thailand -- but barely treading water.

The last time we reviewed the company was in FAT-MIN-187. In that update we focused on the trials and tribulations of exploration and production in Thailand. We also noted that there was great potential upside from the company’s offshore acreage in the NW Shelf. This is still the case.

Carnarvon holds a 50% interest in a cluster of blocks, WA-435-P, 436, 437 and 438. Phoenix-1 and Phoenix-2 were drilled in WA-435-P and intersected extensive gas columns. These gas occurrences have yet to be tested to see if the gas will flow at commercial rates. A 3D seismic survey is scheduled for late 2009. WA-435-P also covers another two large and untested structures.

These four tenements are in an unexplored area between the prolific Carnarvon Basin to the southwest and the Browse Basin to the northeast. The company sees the potential for significant volumes of gas in the order of several Tcf.

Elsewhere, Carnarvon has a 50% interest in WA-399-P, which is also offshore NW Shelf. This block is favourably located between the Pyrenees and Macedon oil and gas fields. The current work program consists of completing 315km of 2D seismic. The company is checking on the availability of drilling rigs and indications of costs.

The company also has a 35% interest in other offshore licences, EP-424 and EP-110. One well has to be drilled within EP-424 before 13 April, 2011.

The big challenge that the company faces is that cash generated in Thailand is being used by active exploration and development activities.

It is the nature of production from the tenements in Thailand that initial flow rates drop quickly so there is always urgency to drill more development wells to at the very least, attempt to hold production steady. Unfortunately production has fallen, and this is reflected in the company’s share price as investors ponder the future.

Thailand does not seem to be generating the excess cash needed to explore the offshore NW Shelf oil and gas plays. This exploration will either be funded from the issue of new shares, or by the company attracting farm-in partners to fund Carnarvon’s share of expenditure – this would of course reduce the company’s interests to only a small share.

Fat Prophets initially recommended buying Carnarvon at 5.4 cents in February 2006 (Fat Mining 13). Our last review of this stock was in August (Fat Mining 187).

In our last review, CVN was trading around $0.64, since then prices have dropped lower to touch $0.473 in early September. Prices then bounced to reach $0.625 in mid-September before being sold off once again.

Consolidation is the current theme. With prices trading between $0.625 - $0.505, the technical outlook is favouring the downside. Since June, the short term trend changed to ‘down’. Coupled with the fact that prices are currently consolidating, indicating a possible continuation of price falls shall prices break the most recent low of $0.473.

The trials and tribulations in Thailand are evident from the September Quarter Production Report. Sales for 3Q09 were $A16.6m, which was a fall of 14% from 2Q09. However, in terms of volume, net sales of 223,722 barrels of oil fell 23% over 2Q09. A fall in sales volume was due to lower output from 3,210 bopd in 2Q, to 2,432 bopd for the 3Q.

Because the company has an established cash flow, the company is not obliged to release quarterly cash flow statements. For FY09, the company reported an operating cash flow of $A32.6m. The company spent $A35.6m on exploration and development, and issued $A1m in new capital. Cash outflow for FY09 was $A2.5m, resulting in a cash balance of $A31.1m at the end of the financial year.

In contrast, AWE Limited (FAT-MIN-193), generated an operating cash flow of $A0.4Bn in FY09, that was used to explore and develop a number of projects, thus giving the company options and new opportunities. AWE has the cash flow to fund high impact wells. Note that AWE has changed name from Australian Worldwide Exploration Limited to AWE Limited – the ASX code is still AWE.

Oil exploration is high risk, and many junior companies struggle to generate excess cash to get to the next step up. This is a sector where investors should focus on companies that generate strong cash flow that can be used to take chances that if successful, will take the company to the next level. In this respect cash provides options and opportunity.

We recommend Members switch from Carnarvon Petroleum to AWE Limited. Carnarvon Petroleum will no longer be held within the Fat Prophets Mining and Resources Portfolio.


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