CVN note from Hartleys

Phoenix South - delayed but far from over
We think the market may have overacted to today’s Phoneix-South-1 well
update. Investors and management are clearly frustrated at not receiving
details on recoverable volumes in a market that has not been kind to oil and
gas stocks because of the rapid decline in the price of oil. In our view
today’s announcement does not change the importance of the Phoenix
South discovery and furthermore CVN were able confirm that the Roc well
will be drilled mid-2015. Assuming CVN receives the cash from the Thai
asset sale, the stock is cash backed at 11c, will start receiving cash from the
Thai royalty in 2015 and the Phoenix South-1 discovery remains one of the
most important oil discoveries in recent years on the North West Shelf. We
maintain our Speculative Buy recommendation on the stock with a price
target of 28cps.

What happened?
Today CVN released a Phoenix South-1 well update to the market. At a
meeting earlier this week of the operating JV, CVN received an update from
the operator Apache. The key takeaway was that detailed laboratory
analysis of well data is not yet complete and therefore CVN is not in a
position to release information about the size of the discovery. A higher
formation volume factor was highlighted within the known limited technical
data which may “result in a lower estimate of oil initially in place”.
Importantly the announcement goes onto confirm that the Roc well will be
drilled in the middle of 2015 (CVN is free carried to a capo of US$70m for
this well). We understand the next JV meeting will not take place until March
2015.

$100m in the bank post the sale of Thai production asset
CVN recently announced the sale of the remaining 20% in its Thai
production. The asset will be sold for US$58.2m via a Sale and Purchase
Agreement (SPA). Noteworthy is that the SPA does not contain any oil price
triggers within the terms. Assuming the SPA completes at the end of
February next year CVN should have around A$110m in cash or 11cps.
This calculation takes into account the cash from this transaction of
A$68.5M (AUD/USD X-rate of 0.85) and cash at the end of September of
A$48.5m.

Target price and valuation
In light of the weaker oil price environment we have made some
adjustments to our base cash valuation (28cps from 34cps). Given that CVN
sold its Thai asset for approximately US$10/bbl of 2P reserves we have
used this as a guide to value Phoenix-South. Our base case valuation for
Phoenix South is therefore a gross recoverable volume of 75mm bbl valued
at US$10/bbl which we then discount by 50% (9cps). We add an additional
6c for exploration, 2c for the value the Thai royalty stream with the balance
of our valuation coming from current cash and cash from the sale of
Thailand. At the end of the September quarter CVN had A$48.5m in cash.
As with the rest of the oil and gas sector the key risk to the CVN stock price
is a further decline in the oil price.

VALUATION
We maintain our Speculative Buy recommendation on CVN with a target price of 28cps. The breakdown of our valuation is contained in Figure 1.
In attempting to put a preliminary valuation around the Phoenix South discovery we have taken into consideration recent transactions, peer group trading multiples and the relatively high cost of development in Australia. We would caution that significant analysis and testing still needs to take place over the next month before more precise reserve estimation can take place.
In the table below the value of the Thai asset is based on the actual value of the asset sale announced today.