CEO Newsletter
Dear Shareholders,
Many of you at our Annual General Meeting this year asked that I continue providing these “behind the scenes” updates via this CEO Newsletter. I trust you’ll find this update of interest and I look forward to continuing this initiative in 2015.
Before reflecting on everything we’ve achieved in 2014, I think it’s worth responding directly to the market reaction to the recent update on the Phoenix South-1 well test work being undertaken by Apache. In my view, the market over-reacted to this announcement, writing our share price down almost 30%. In essence, this was because estimates of oil volumes and recoverability were not ready due to incomplete and yet to be integrated data. The data process has taken longer than we’d previously expected with busy laboratories particularly affecting the timing of the work done and the order and sequential nature of the testing work.
The fact remains that we made a significant and regionally important oil discovery in an entirely new oil province. In addition we have further structures to drill that are also likely to contain oil. The next structure to be tested, by the Roc-1 well, is expected to commence mid 2015 and is expected to be fully funded by Apache and JX Nippon. At 12 cents per share, the value of Carnarvon essentially represented the value of our cash, receivables and Thailand production assets, meaning the market ascribed little or no value to the Phoenix acreage.
I considered this an outstanding opportunity to acquire more shares on market, which I did on 15 December 2014, taking my personal shareholding to 8 million shares.
Now I’d like to reflect on 2014 and a year that has probably been the most eventful in the Company’s history. We started with Apache delaying the spud of the Phoenix South-1 well while Thailand production stubbornly refused to respond to the relentless efforts of the operator.
This was a difficult time, but one that was clear to us in terms of our strategy and the goals we’d set out to achieve.
In March, the first of those goals was achieved with the completion of the sale of half of the interest in our Thailand oil production assets. Importantly the sale ensured we were well funded leading into the Phoenix South-1 well drilling, and proved to be a prudent decision.
Shortly after we sold down our interest, production from the oilfields in Thailand significantly increased and more importantly stabilized at these higher flow rates.
In May, we were awarded three new contiguous blocks in the Carnarvon Basin, which we have collectively named the Cerberus Blocks, after the Greek mythological three-headed beast that guards the gates to the Underworld.
Importantly, these blocks were secured on low commitment terms and provide the next opportunity for value creation through our exploration activities. We plan to do this by replicating the Phoenix model. That is, through detailed technical work, we’re able to attract a partner with operational and financial resources to work with us in exploring new play types on the North West Shelf.
Also behind the scenes we moved office around this time. The objective was to provide a more professional environment for our business, particularly for hosting major companies when they come in to assess our technical work and commercial proposals. An added benefit was that the new lease costs were on exceptionally good terms.
The drilling of the Phoenix South-1 well began well with early progress being ahead of schedule before a series of technical problems required two sidetrack wells that caused an over run in the projected schedule drill time. Thankfully the Apache team pressed on and when they introduced the Saturn Probe wireline equipment we realised that the Phoenix South structure wasn't a gas play, but was in fact an oil play.
While the Apache team then went to work analysing the results of the well, the Carnarvon management team travelled internationally to present the story to fund managers, investors, brokers and analysts. The Phoenix South-1 discovery created interest globally and we found a very receptive audience wherever we visited. Although it was known at the time that we were still in the very early days of the exploration program, and a huge amount of work was needed to prove up our discovery, the market response was very positive. We took advantage of the excitement created by our discovery to lay important foundations for attracting strategic cornerstone investors in the future.
We also made a decision to divest the balance of our interest in our oil production assets in Thailand. As we announced recently, we have now entered into a sale and purchase agreement to divest ourselves of these assets, which on completion, will see Carnarvon holding around A$100 million in cash. Importantly this transaction will complete our transition to a well funded North West Shelf focused exploration company.
How the Phoenix area will ultimately play out in terms of exploration, appraisal and development I can’t say at this time. It’s simply too soon to make any predictions and foolish to do so. We’re at the start of the journey and we should anticipate many twists and turns to come along the way. It’s why I continue to be cautious, prudent and conservative about our exploration results and deliberately avoid making bullish or forward-looking statements that have the potential to over-inflate market expectations.
That being said, I certainly do not underestimate the significance of our Phoenix South-1 oil discovery and the huge potential of opening up and developing an entirely new oil province on the North West Shelf in the years ahead. Your management team and board are very excited by these opportunities and we have enough “skin in the game” to ensure our interests and those of our shareholders remain very closely aligned.
In summary, 2014 has been a watershed year for Carnarvon Petroleum, but in many respects just the beginning of what we think is a very exciting period ahead.
2015 promises to be even more exciting. The first goal is to complete the Thailand asset sale, which we expect will happen in February.
I hope to be in a position in March to provide another update on Apache’s work on the Phoenix South-1 well. I can assure you that we will release what we can, as soon as we can. I also appreciate shareholders are keenly awaiting information on the Phoenix South-1 volumetric data which we’ll provide as soon as we possibly can.
I’m particularly looking forward to spudding the Roc-1 well by the middle of 2015. The Roc-1 well will test the next updip structure to Phoenix South, and we believe this has the potential to give us a real lift in terms of volumes and development options for future oil production.
Behind the scenes, the Joint Venture partners are also considering options to acquire more 3D and 2D seismic data over the Phoenix blocks and are planning appraisal wells at Phoenix South and Roc that will be contingent on the technical results from the exploration wells. I will keep you posted as these activities progress and become firm work programs.
As we wrap up our efforts in 2014, I’d like to take this opportunity to sincerely thank the hard work and dedication of our staff and my fellow directors and their families for their contribution to our success throughout the year. And finally, I’d thank you, our valued shareholders, for your ongoing support and to wish you all the very best for the Christmas holidays and for the year ahead.
Adrian Cook
Managing Director
Carnarvon Petroleum
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