Carnarvon drills for oil off WA with east coast market in mind
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Australia’s lop-sided oil and gas industry — shortages in the east and a glut in the west — is throwing up some interesting investment ideas.
Perhaps none more-so than Carnarvon Petroleum (ASX:CVN) — which is now drilling two potentially company-making wells.
Named Phoenix South No.3 and Dorado, the wells are part of the broader Phoenix project which is about 250km north of Port Hedland on WA’s north-west coast.
Carnarvon’s interest in Phoenix varies from 20-to-30 per cent depending on the tenement boundaries. The overall area is considered a prime location for delivering gas into the domestic WA market thanks to pipeline connections to industrial and household markets in the south of the State.
Speculators have been building positions in Carnarvon since the start of the year, lifting the stock by 60 per cent — from 10c in early January to latest sales at 16c — valuing Carnarvon at $160 million.
But it seems unlikely buyers are interested in a relatively small oil and gas explorer which might try and sell gas into the already over-supplied WA energy market — or become a small offshore oil producer.
The much bigger target is getting gas to Sydney or Melbourne.
Carnarvon and its partners, including Quadrant Energy, could potentially be winners if progress is made on a proposed trans-continental gas pipeline.
A project which has been on the drawing board for more than 40 years, the pipeline has never moved ahead because of high construction costs and low energy prices.
A lot has changed in the past few years. The cost of building a pipeline across Australia has come down and the price of gas has gone up.
But whether it’s gone high enough, or whether investors (and banks) would be prepared to fund an infrastructure project of national importance, is a considerable unknown.
Long before any pipeline plan is approved, the exploration side of Carnarvon’s activities will be closely followed as the next few months are taken up with the painstaking process of drilling wells with targets between 4000 metres and more than 5000 metres deep.
Phoenix South No.3 is chasing the bigger prize — a potential 143 million barrels of oil equivalent (a combination of oil and gas) in a geological formation known as the Caley Member.
The target depth of Phoenix South No.3 is 5500 metres, with drilling expected to take 90 days from when the well started in mid-April. That means news of a discovery (or not) is unlikely before mid-July.
Dorado, the second well heading for the same target formation, started drilling last week and is expected to reach its target in around 40 days.
Price rise sparks interest in oil stocks
Because oil exploration has lost its attraction to many investors — especially after the 2014 oil price crash and also because of a lack of exploration success in Australia over the last 20 years — there has been little interest in Carnarvon and other small explorers.
But the recent rise in the price of oil to more than $US74 a barrel has sparked some interest in the sector.
A lot can be expected if the Australian petroleum industry and construction companies can find a way to get gas from one side of the country to the other.
Building a pipeline is one possibility. Shipping liquefied natural gas (LNG) another.
Those two potential gas transport options are generating interest in government and engineering circles while a number of other developments in west coast oil and gas are emerging.
One of the most significant recent moves was the takeover struggle for AWE, a company which has made a significant gas discovery near Dongara north of Perth with the winning bidder, Japan’s Mitsui, said to be interested in the transcontinental pipeline proposal, as were other bidders for AWE.
Western Gas, a private operator, is making progress to develop the Equus gasfield it bought from US-based Hess Corporation last year, with potential markets being a pipeline east or as feedstock to one of several LNG plans along WA’s north-west coast.
However, in the rapidly evolving west coast oil and gas market the ASX-listed stock likely to generate the most news over the next few months is Carnarvon, which itself could become a takeover target in the same way AWE did if Phoenix South and/or Dorado are successful.
Hartleys, a Perth-based stockbroking firm has a speculative buy tip on the stock and a 12-month price target of 25c, but if with exploration well being drilled now encounters something significant then that price forecast might prove to be conservative.