Oil small caps are heating up and Carnarvon is ready to benefit
As the oil sector hots up, investors are sifting through ASX stocks looking for those best placed to benefit, writes Barry FitzGerald in his Garimpeiro column.
Oil and gas stocks have emerged as one of the market’s hot sectors after spending almost four years in the wilderness because of the June 2014 collapse in oil prices.
Their hot status comes from the dramatic rebound in oil prices, with oil posting a 65 per cent gain from last June’s low of $US45 a barrel to $US74/bbl (Brent). (Bbl is a measure of one 42-gallon barrel).
The price surge is a response to production cuts by the OPEC cartel, production shortfalls in some big producing nations and improved economic growth fuelling stronger demand.
While oil remains well short of the $US115/bbl levels before the June 2014 price crash, the industry has reset its cost base to levels to accommodate a $US45/bbl oil environment, making the current price of $US74/bbl something of a bonanza.
The net result is that confidence has returned to the sector in a big way. That has been reflected in a flurry of merger and acquisition activity.
Recent examples include Santos (ASX:STO) becoming the subject of a potential $13.5 billion takeover bid from US private equity group Harbour Energy, and AWE Ltd (ASX:AWE) being taken over by Japan’s Mitsui for $602 million.
The activity has driven big share price gains for the target companies over and above what they were already enjoying thanks to the rally in oil prices to more than $US70/bbl.
Investors are now sifting through the ranks of ASX-listed oil and gas companies to find those best placed to benefit from the oil price rally, as well as qualify as likely takeover candidates.
North West Shelf oil and gas explorer Carnarvon Petroleum (ASX:CVN) is one that qualifies.
It last traded at 14.5c a share for a market cap of $150 million, and is holding $48 million in cash — which more than covers funding for an exciting 2018 exploration and appraisal program.
Broker Hartleys has just given it a 25c a share 12-month price target on the strength of the program.
Activity kicked off last week with drilling starting at the Phoenix South-3 well, an appraisal of the condensate (light oil) and gas encountered previously in the Caley sandstone in Phoenix South-2 but which was not properly penetrated.
“A successful appraisal of Phoenix-South will also likely attract takeover interest, with Carnarvon post appraisal success being one of the largest independent holders of uncontracted gas in Western Australia (post the acquisition of AWE by Mitsui),’’ Hartley added.
The appraisal well is part of the greater Phoenix project hub which contains other gas/condensate discoveries, as well as the potentially high impact Dorado oil/gas exploration target to be drilled starting in May.
Success with either Phoenix South 3 and/or Dorado is expected to confirm the development potential of Phoenix.
Carnarvon owns 20 per cent of the action, with the privately-held Quadrant Energy the project operator and 80 per cent partner.
Currently at least, the market does not ascribe much value to another project on the verge of becoming very valuable to Carnarvon — its 100 per cent owned Buffalo rejuvenation oil project in the Bonaparte Basin in waters administered by Timor-Leste.
Buffalo was discovered in 1996 by BHP. At its peak it produced oil at a daily rate of 50,000/bbls from four wells, before being decommissioned in 2004.
Buffalo has a “contingent resource’’ estimate of 31 million bbls of recoverable oil.
At current oil prices, it has a revenue generating capacity of $US2.3 billion which explains why Carnarvon believes a redevelopment costing about $US150 million “can deliver significant value’’ to the company.
The company’s growing confidence in Buffalo’s redevelopment is due in part to the advances in seismic surveys since the field was first developed.
The greater clarity of targets that can be achieved with modern techniques is particularly important at Buffalo because of the difficult seabed topography.
Carnarvon’s aim is to drill the first production well for the Buffalo redevelopment next year — another potential major re-rating event for the company.
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.