Striking oil

Alan Kohler here with today’s CEO and it’s Adrian Cook of Carnarvon Petroleum.  Last week Carnarvon Petroleum attracted a lot of attention when its share price doubled to 35 cents after announcing a new oil discovery off the west Australian coast on the Northwest Shelf.  Carnarvon owns 20% of it with an unlisted company called Quadrant Energy, which is owned by the Canadian infrastructure business, Brookfield and also Macquarie. 

But it was so exciting and lots of people got terribly interested in the thing so we thought we’d ring up Adrian, the Managing Director of Carnarvon, to find out more about it and what they’ve found and what the background is, so here’s Adrian Cook, the CEO of Carnarvon Petroleum. 

Here's Adrian Cook, the CEO of Carnarvon Petroleum.

Adrian, before we get into what the discovery is that was announced last week, can we just get a bit of background on the field and how come Carnarvon Petroleum has 20% of it?

Sure, thanks for having me on, Alan.  Carnarvon – just a little bit of background – focuses on the offshore Western Australia, an area we call the Northwest Shelf.  We currently have 15 permits in that area and a very dedicated team focused on it.  Back in around 2009 we picked up four exploration permits altogether, for simplicity we called them the Phoenix projects.  We’ve been working on those since then, we brought in partners like Apache, who then became Quadrant Energy and we’ve drilled four discoveries to date in the permit and we’re currently drilling wells number 5 and 6. 

We announced last week, just a progress report and I should stress it is only progress because we’re still drilling.  But we announced we had discovered nice quality oil over very high quality sand, it was quite substantial and from that we’ve seen quite a re-rate in our share price over the course of the last week. 

Yes, of course.  These were your permits on the Northwest Shelf that you farmed out to Apache, is that right?

That’s right.  Ourselves and a private concern back in the day went into explore and that’s what we do, we look to pick up something based on our scientific work that looks perspective.  We then look to create some value in some way and in this case we acquired the first ever 3D seismic data in this area in this basin and that’s how we attracted the likes of Quadrant energy to come and drill some wells for us.  It started off with Carnarvon and a junior partner called Find Exploration as the genesis for what we’ve got today. 

Can you locate this field, Phoenix Project as you put it, in relation to other discoveries in the Northwest Shelf, how does it sit?  Where does it sit exactly?

Back in the early 60s, Woodside famously came in and picked up a very large acreage holding in what’s called the Carnarvon Basin.  It’s now of course gone on to create a multi-billion dollar business.  Just north of that is the next basin in what we call the Bedout.  It’s just north of the Carnarvon Basin, it’s around 150 kilometres offshore of Port Headland just as a reference point. 

How come it was available?  Why didn’t Woodside pick it up?

What happens in Australia, and I think it’s a great system, permit holders can only sit on exploration permits for a fixed period of time.  They either need to do something with it or what we call relinquish it – give it back to the government to give it to somebody else to have a go at.  This area’s had quite some history.  Back in the 80s BP was drilling for oil and it drilled two wells in 1980 and 1982.  It discovered gas, it wasn’t after gas and at the time there was no gas infrastructure in WA.  I think after that Woodside in fact did hold it for a period of time but relinquished it.  We picked it up in 2009. 

The great thing, as I said, the Australian system allows different parties over time to secure these types of permits, put technical work onto the blocks, see if they can make these sort of discoveries.  At different times there are different opportunities.  When things are active and oil prices are strong then big companies have big budgets, they’ll actively be drilling and counter to that the big companies often retract fairly hard with their budgets.  2008-2009, as a reminder, was back in the GFC.  So, we picked them up, we had really no one else was bidding for these blocks. 

Quadrant Energy, which as you say came out of Apache Energy which sold off its Australian assets into this business, Quadrant Energy’s biggest shareholders are Brookfield, the Canadian infrastructure outfit and Macquarie.  Can you tell us the detail of the deal you’ve got with them?  Is it a straight out 80/20 equity arrangement or are there more sort of wrinkles in the deal? 

We started that in 2012 when it was Apache and they agreed to basically pay for the cost of drilling two wells.  Now, we’ve drilled those wells and we’ve moved on.  There are four permits here that are involved, two on the western side where we hold 20% and Quadrant hold 80%, and there’s two on the eastern side where we hold 30% and Quadrant hold 70%.  That’s just evolved over time as we have, I guess, worked with what was Apache and now Quadrant to manage Carnarvon exposure as a small company and be able to use this with a stronger financial reach of Apache and Quadrant. 

That’s how the equity mix sits at the moment, there’s a little bit of history behind that.  But I would say that Quadrant have been a tremendous partner, a very supportive partner of Carnarvon and continue to be so and really, together working to each other’s strengths is how we’ve got to this point today.

You raised $16 million dollars in May.  Are you going to take advantage of the doubling of your share price to raise some more money?

We raised the money to proceed with actually another oil fields development that we have in the company which is called Buffalo and that’s up in the Timor Sea.  That’s another great asset and one that we’re really looking forward to bringing onto production.  When we were drilling Phoenix South and Rockwells, at the time we thought on balance they were likely to be gas and condensate discoveries for which, because we’re quite aggressive on our views on oil prices, we would have prioritised the Buffalo development.  Now that Dorado is oil and we had two oil field developments in the company to be assessing, I think we’ll be taking stock as a board of directors and just working out where the best deployment of capital is going forward, which of the two of those oil field developments should take priority. 

Because the news is so fresh on Dorado, as in last week, the board of directors of Carnarvon haven’t had an opportunity to confer, so I don’t want to speculate on which project gets priority in the near term, but I would say that the company is really well capitalised, very strong cash position, two really good oil projects to focus on, the opportunities for shareholders are pretty tremendous and pretty rare for a company of our size to have these types of opportunities. 

Let’s talk a little about Dorado and what exactly is there.  Fred Weir from Quadrant was quoted in The West Australian the other day as saying, ‘The low case is solidly commercial, the mid case is awesome and the upside is staggering.’  And that it’s a game changer both for Quadrant and definitely for Carnarvon.  Would you go along with that description?

In my role I have a slight hamstring being what the ASX listing rules allow us to say and not say.  For Carnarvon we have to take some more time and do some more work to satisfy those listing rules, so we’re not in a position to make quite the same comments that they’ve made.  I would echo though, Fred Weir’s enthusiasm, that this is a tremendous discovery and shouldn’t be discounted as such.  I think it’s one that Carnarvon’s incredibly excited about and we think it’s certainly an important pillar for the success of this company going forward.

Can you tell us how much oil is there according to what the drilling has shown so far?

We honestly can’t at the moment.  We are still progressing.  As I’ve been saying to shareholders last week, let us finish drilling.  There are a number of sands we still have to drill through probably over the course of the next fortnight.  I think we’re in a great position technically to be able to then assess the discovery and I’m hoping around four weeks after that we’ll be able to come out with a reasonably concrete estimate on the volumes of oil that will then really give us a good go-forward position with this project.  

I note that you went into a trading halt last week for a day or two and made the announcement, but the share price actually popped up 20% before that trading halt.  Did you actually announce something before then on the 13^th that resulted in that or did the news get out in some way, did someone find out about it?

No, I think it’s just speculative investors taking some punts on knowing that news is coming as to what might be discovered.  We’ve seen that in other wells, that speculative money.  We have a second well that’s drilling right now and that’s just about to go into its reservoir area and I think we’ll see some similar activity, people taking a bit of a punt on a positive outcome that will do what Dorado did for the share price.  As I said, we’ve seen four or five wells that we’ve drilled over the last five years.  We’ve seen similar activity as we update the market that we’re getting close to reservoir and people taking these sort of positions.

Is there any way that investors can make some kind of assessment about your $400 million market cap and whether that’s a decent valuation of what you’ve got?  Can you provide any guidance on that? 

Not at this stage, Alan.  It’s a tough question and a harder answer.  There is inherent value in my view around the Buffalo Oil Field.  There’s inherent value now around Dorado, but we can’t yet categorise that.  We’re still drilling into further prospective sands in Dorado and we’ve got another well that’s right on top of its reservoir.  I think there are a whole raft of different valuation factors going on at the moment from intrinsic underlying asset valuations to people just taking speculative positions.  I think there’s a whole mix of that. 

For me, let the speculations do what they wish to do, that’s part of the energy of the market, but for me I’m prepared just to be more patient, take a longer view, let Quadrant and let Carnarvon’s teams finish the wells, do the proper sites and then come out in a considered way with what we think the results and the volumes look like, from which then the analyst can really get a handle on what the intrinsic value of the business is going to be.   From my perspective, what I’m saying to people is, that’s not that far away really.

Dorado is a couple weeks to finish the well and only four weeks after that before we can come out, having done the science, giving people some categoric answers. 

Do I take it from what you were saying before that you’re going to have to choose between Dorado and Buffalo?

That’s one scenario, definitely.  One of the challenges we have being of our size is the constraints of capital.  We have to focus on where and how we can generate the highest share price.  One of the factors that affects that is how much capital we issue, how many shares we have on the market.  Whilst we could raise a lot of money and develop both of these projects together, we just have to do the math to see whether that produces the higher share price or just stagger the two projects.  

While we raise the money for Buffalo, I don’t think too many people would be upset if we said, ‘Having fully considered all the facts, we think Dorado should be developed first, then Buffalo, and that produces the best outcome.’  And that’s why we’ll redeploy the capital I don’t think too many shareholders will be upset with that case, it’s a bit of a champagne problem, as people say.  

Yeah, that’s right, but you haven’t made that decision yet?

No, we haven’t.  In fact, the board of directors have not yet conferred in a board meeting at this point to even consider the Dorado result today.  Again, I’ll stress that what we put out last week was just a progress update.  There’s still more to do and more to drill and more targets that we’ve got to evaluate.  Fingers crossed we find more of the oil in quality sands as we drill deeper.

Great to talk to you, Adrian.  I look forward to staying in touch and we’ll give you a call, if that’s all right, when you put out the definitive results.

Absolutely.  Great to talk to you, Alan, thank you.

That was Adrian Cook, the CEO of Carnarvon Petroleum.