Small Caps | Jun 19 2012
– Central Petroleum has one of the world's largest onshore acreage positions
– Recent oil discovery a positive
– A farm-in deal could prompt a share price re-rating
– DJ Carmichael initiates coverage with a Spec Buy rating
By Chris Shaw
Central Petroleum ((CTP)) has a portfolio of onshore oil and gas assets that is one of the largest onshore acreage positions in the world, covering 68 million acres in Central Australia. The assets cover the Amadeus, Southern Georgina, Pedirka and Wiso Basins.
This means Central Petroleum has a diversified portfolio across a number of basins and play type, offering greater flexibility and less risk moving forward. The Amadeus Basin is most advanced in terms of offering near-term cash flow potential, while the Southern Georgina Basin is highly prospective for shale oil and gas.
DJ Carmichael has initiated coverage on Central Petroleum with a Speculative Buy rating, seeing potential for a significant share price re-rating given the prospects of the assets held and the potential for a maiden farm-out of some of the acreage.
A recent game changer for Central Petroleum in the view of DJ Carmichael was the oil discovery at the Surprise-1 well in the Amadeus Basin, which flowed oil at 380 barrels per day on a test. This well offers scope for near-term cash flow generation, while also strengthening the credibility of Central Petroleum's acreage.
At present the Surprise discovery has resource estimates ranging from 4-110 million barrels of oil in place. DJ Carmichael estimates if a 10 million barrels discovery is confirmed, this would be worth around $150 million on a net present value basis. This would more than underpin the current market capitalisation of Central Petroleum.
A farm-out deal to fund future drilling remains the missing link for Central Petroleum in the view of DJ Carmichael, but the broker sees such as deal as possible given 15 internationally recognised exploration and production companies have expressed interest in acquiring exposure to Central Petroleum's acreage.
Assuming a farm-out deal can be secured DJ Carmichael expects a significant share price re-rating. Another positive is the recent appointment of Richard Cottee as CEO and potentially managing director, as DJ Carmichael notes he brings to the table a proven reputation as a dealmaker and a good track record in growing a company.
Longer-term, DJ Carmichael suggests as the Australian shale space matures and more reserves are booked, corporate activity from major energy players will intensify. Given key attributes for acquirers are likely to be asset focus, scale and reserves potential, this bodes well for Central Petroleum in the broker's view.
In terms of valuation, DJ Carmichael suggests Central Petroleum is undervalued relative to peers when measured by enterprise value per acre. This reflects the lack of an farm-out deal and supports the expectation a re-rating is likely if such a deal can be put into place.
Given a current market capitalisation of around $125 million, Central Petroleum receives little coverage in the market. As evidence, none of the brokers in the FNArena database offer research on the company.
The upside potential is clear given DJ Carmichael has a price target on the stock of 33c, which compares to a current share price of around 10c. Shares in Central Petroleum today are higher in a weaker overall market and as at 11.40am the stock as up 0.9c at 10c. This compares to a range over the past year of 4.2c to 11c.
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