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Carnarvon Petroleum (CVN)

Operations

Carnarvon Petroleum (CVN), formerly Metana Petroleum NL (MTP), is an oil and gas exploration company with operations in Australia and Thailand. CVN’s primary assets are four producing oil fields in central Thailand and together with associated exploration and appraisal opportunities, comprise the company’s Phetchabun Basin joint venture.

Investment opinion

CVN became a Lincoln Star Stock on 3 March 2009 following the announcement of outstanding interim results for the half year ending 31 December 2008 due to the commencement of oil and gas production over the last 18 months. The company’s performance is quite remarkable when considering that oil prices have fallen from a peak of US$145 per barrel to as low as $35 per barrel over the last year. The company is expected to continue to improve its earnings profile due to production increases despite the current environment. Should the oil price continue to recover, CVN may be an attractive investment opportunity for those willing to be exposed to a growing company within a typically high risk sector.

Financials

CVN is in a Strong position of Financial Health. Net operating profit before tax and significant items rose to $48.468 million for the period 1 July to 31 December 2008 from $10.058 million in the previous corresponding period.  Pre abnormal EPS increased from 0.80 cents to 3.22 cents which translates to EPS growth of 302.5%. The increased profit primarily reflects higher production together with reduced operating costs per barrel. Oil sales from the company’s Phetchabun Basin joint venture during the half year to 31 December 2008 increased to 1,728,477 barrels from just 466,266 barrels in the previous corresponding period. ROA also improved significantly from 56.39% to 73.86%.

Valuation

CVN’s share price has fallen from its high of $0.80 on 16 May 2008. The company last closed at $0.34 which is a 31.46% discount to the Lincoln Valuation of $0.50 and indicates potential for share price appreciation.

Outlook

CVN management’s outlook is positive yet cautious. Management recognise the uncertainty of the current economic climate and the fact that weakening oil prices will impact their revenue streams. However, CVN’s conservative capital structure, strong cash flows and substantial cash balance place the company in a solid position to acquire additional assets or attempt to consolidate the company’s position to benefit from a future recovery in oil and gas prices. Along with CVN’s recent announcement of a 46% increase in oil reserves at its Thailand operations and the recent recovery of oil prices coupled with the weak Australian dollar, provide optimism regarding the company’s results for the second half of FY09.

Why is management assessment important?

Once you’ve established a company is in a solid position of financial health, it is important to assess the ability of the company’s management team to grow the business.

How is management assessed?

A company’s Return on Assets (ROA) is considered to be the strongest correlating factor to share price appreciation. We identify a quality management team as one which has achieved ROA of greater than 8% p.a. on an improving trend. If you consider that the ‘risk free’ rate of return is currently around 4.5% p.a., we look for a management team that can utilise the assets of the business to achieve ROA of greater than 8% p.a.

In our example above, CVN’s management team has performed exceptionally well achieving annualised Return on Assets (ROA) of 73.86% for the half year ending 31 December 2008.

CVN displays the signs of a quality management team through their ability to achieve an upward trend in ROA over the past three years. With the company’s strong growth profile and defensible earnings outlook, CVN’s management team is expected to continue delivering outstanding ROA results.

 

 

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Important information:

Author: Tim Lincoln. Lincoln Indicators Pty Ltd ACN 006 715 573 (Lincoln) AFSL 237740.

This information is current as at 25 March 2009.

Our advice and the advice of our Authorised Representatives (including advice in this communication) are prepared without taking into account your personal circumstances.

You should therefore consider the appropriateness of the advice in light of your objections, financial situation and needs, before acting on it. Where our advice relates to the acquisition or possible acquisition of a financial product, you should obtain a copy of and consider the Financial Services Guide (FSG) before making any decision. Investments can go up and down. Past performance is not a reliable indicator of future performance.

Our analysis and advice is impacted by AIFRS. Please refer to our website for further information: www.lincolnindicators.com.au/AIFRS. Testimonials are provided by third parties for information purposes only and are not intended to be financial product advice. They do not represent opinion or advice from Lincoln. The information provided may not be appropriate to your particular circumstances. You should consider obtaining your own independent advice before making any decision.

Lincoln, its director, employees and agents, makes no representation and gives no warranty as to the accuracy of this communication and does not accept any responsibility for any errors or inaccuracies in or omissions from this communication (whether negligent or otherwise) and shall not be liable for any loss or damage howsoever arising as a result of any person acting or refraining from acting in reliance on any information contained herein. No reader should rely on this communication as it does not purport to be comprehensive or to render advice. This disclaimer does not purport to exclude any warranties implied by law which may not be lawfully excluded. Lincoln, its employees and/or its associates do not hold interests in: CVN. This position could change at any time without notice.

Economic and other information taken into account in forming any opinions are subject to change and therefore opinions expressed as to future matters may no longer be reliable.