Carnarvon Petroleum
Recommendation
Pan Orient Energy, Carnarvon Petroleum’s joint venture partner in Thailand, has sold its 60% stake in the L44/43, L33/43 and SW1A leases for $170m, valuing Carnarvon’s 40% share of those properties at $113m (16 cents per share). The deal highlights two truths about Carnarvon; its leases are difficult, which is why Pan Orient has decided to throw in the towel, and its assets remain cheap.
Compared with the $113m value implied by the transaction, Carnarvon currently trades on an enterprise value of just $77m. The 40% difference between the value of the company and the value implied by the transaction suggests investors doubt profits can be made from those oil fields. Expectations, in other words, are low. If Carnarvon and the new owner succeed in increasing production rates, the value of those assets will rise substantially.
Today’s price not only undervalues Carnarvon’s share of the producing Thai fields, but also implies zero value for three additional concessions being developed in Thailand and all of Carnarvon’s Western Australian assets. That’s a decent margin of safety. Yet while technical difficulties continue to impede higher production rates, a valuation gap is likely to persist. New production results will be vital in assessing progress, but against the geological limits of nature, innovation and ingenuity can only do so much. Carnarvon’s share price has fallen 11% since 08 Mar 12 (Hold – $0.14) and, with a decent margin of safety built in, there’s enough upside to HOLD.