Central Petroleum: valuation of $0.48 by Bakers Investment Group

Central Petroleum (ASX: CTP) has been given a valuation of $0.48 in an updated report written by Bakers Investment Group titled "Longer Term Valuations of Central Petroleum Resources."

Introduction

Central Petroleum has received a number of possible valuations for its large portfolio of resources. Each of these valuations is based on various assumptions about the value of different methods to monetise Central Petroleum?s potential projects which could proceed.

Based upon a review of these valuations, a long term risked value of Central Petroleum based on 100% of its assets of between 5 and 10 years at between $3.6 billion and $4.6 billion; a corresponding diluted longer term conservative share target price of between $1.75 to $2.16 depending on a number of important assumptions which will be addressed in this report and a short term share target price of $0.48 per share

The base valuations used in this report come from a various independent and company prepared reports previously released to the market and each should be read in their entirety, particularly in relation to the potential risks of each project.

Overview of Central Petroleum

Central Petroleum is a junior exploration and production company with extensive granted and pending tenement acreage in Central Australia, totalling over 70 million acres, predominately in the Northern Territory, almost entirely 100% net owned.

Within this acreage large resources of oil, natural gas, helium and coal have been identified and/or inferred by independent geological assessment. These resources are located within four main geological structures; the Amadeus, Pedirka, South Georgina basins and the Lander Trough of the Wiso Basin.

Central Petroleum has identified a number of oil and gas prospects in the already-producing Amadeus Basin and in the Pedirka Basin which could be brought to market relatively quickly following further drilling to determine the full extent of the resources.

The company is in a strong position to exploit available resources utilising existing geological data supplemented by more recent drilling and seismic studies.

These tenements have relatively close access to the relevant infrastructure, particularly the rail link to Port Darwin and an existing gas pipeline also to Darwin.

In addition to its oil and gas prospects, Central Petroleum has identified significant coal assets in its Pedirka Basin tenements through independent geological assessment. These coal assets have potential for coal mining, coal-to-liquids (CTL) and underground coal gasification (UCG).

Short-Term Valuation by Bakers

Bakers Investment Group released a valuation report in July 2011 in regards to Central Petroleum?s short-term assets, giving a valuation of $414.7 million, or $0.48 per share based on current shares outstanding.

This report looked at Central Petroleum?s plans for the next 12 months and presented a valuation based on the current strategy of bringing priority projects to market.

Central Petroleum had identified these projects, Surprise-1, Madigan Prospect and Mount Kitty, as being the best base on which the company?s other projects could be built upon in the future.

Given the greater certainty that these projects will proceed as announced to the market, the valuation contained within that report were included as the base valuation for total company valuation should those scenarios be realised.

Unconventional Oil & Gas Resources

To value its unconventional oil & gas resources in the Amadeus and South Georgina Basins, in August 2011 Central Petroleum commissioned DSWPET Pty Ltd, an independent petroleum consultant company, to prepare a valuation of these resources.

This valuation used two methods for valuing the resources, the commercial transactions method which looks at similar recent deals and compares them on a dollar per acre basis, and the end-of-market valuation (EMV) method which looks at the risked resource amount multiplied by the sale price less all exploration and appraisal costs.

However, these two methods produced widely different valuations ($124 million compared to $1.04 billion), a result which, according to their report was unsurprising to DSWPET given the immaturity of the Australian unconventional oil & gas industry and the resulting uncertainty in the utilised information.

Therefore, using the logarithmic mean of the two valuations, DSWPET came to the fair valuation of $420 million for the resources.

Underground Coal Gasification Resources

In June 2011, Central Petroleum commissioned Bakers Investment Group to prepare a report on the potential value of monetizing its coal resources in the Pedirka Basin through underground coal gasification techniques.

This report by Bakers was based on the resource estimations contained in two reports, one by Mulready Consulting (2009) and one by Al Maynard and Associates (2011). The report contained three cases based upon the resource estimations; however these valuations were not risked.

For the purposes of this report, the medium case has been used to value the entire resource present at the Andado Shelf deposit. However, we have given a very strong risk factor to the resource due to some uncertainties surrounding the potential project.

Taking a very conservative view, only a 10% chance of success was used, due to:

- political uncertainty surrounding the UCG industry in general around Australia, though every indication is that the North Territory Government is supportive of UCG, and the fact that tenements are not on prime, or even marginal, agricultural land, and
- the potential for financing risk, particularly due to the size of the entire project if the majority of the resource is to be developed.

Despite applying this very conservative risk assessment, the resource still represents a large value proposition in the long term. Project/Resource Group Risk-Assessed Value Value Per Share3 Underground Coal Gasification $2,697.0 million $2.75.

Gas to Liquids Plant Proposal

In August 2011, as a part of the DWSPET report on its unconventional oil & gas resources, Central Petroleum commissioned Holt Campbell Payton (HCP) to prepare a valuation on a potential gas-to-liquids plant.

While the valuation is independent of the DWSPET report on the gas resource, the valuation assumes a risked 5 trillion cubic feet of gas (TCFG) resource to be delivered to Darwin via gas pipeline.

HCP presented a range of valuations for such a plant, depending on key variables and different options which could be selected by the company. A nominal fair valuation presented in the report is based upon a 60% debt share at 8%pa with a discount factor of 12%, however this valuation was not risked.

This report has assumed a conservative risk factor of 20% chance of success if Central Petroleum pursues the project along the lines as described in the HCP report due to the scale of the project.

We have given this risk factor for a number of reasons including feedstock risk should the downstream resources not proceed as planned, potential downturn in the market for liquid fuels, political risk, and financing risk for a project of such a scale including the likely need to find a suitably large partner to develop the project. However, despite these risks significant value remains in the project.

Company Long-Term Valuation

Having reviewed the various resource valuations available and done risk assessments on those which have not already been done, we have prepared a long-term valuation of Central Petroleum, with a horizon of 5 to 10 years. This valuation is built upon a number of assumptions, both company-wide and project-specific.

Of particular importance is that these valuations assume these projects will be 100% owned and operated by Central Petroleum, with no profit sharing arrangements.

We have prepared two valuations based on our review. The first valuation purely looks at Central Petroleum?s resources and resource projects.

We believe that this valuation is conservative due to its heavy risk loading due to the immaturity of the projects and current state of the industry in Australia. As Central Petroleum progresses with these projects, we believe there is potential for greater value in these projects.

The second valuation includes the risked valuation of the proposed gas-to-liquids plant in Darwin using gas feedstock from Central Petroleum?s resources. We believe that this valuation is also conservative and therefore it is likely to increase as certainty is improved.

Central Petroleum has previously informed the market of its plans to progressively farm out a proportion of its acreage in small increments of approximately 500,000-1,000,000 acres for areas with unconventional potential, relying upon exploration success in its ground as well as surrounding acreage with other players to enhance the value per acre of its dealing as each new farm-out is done.

It should be noted that if the Australian unconventional industry approaches the value per acre of that in various parts of North America, then the value per acre of Central Petroleum?s vast “land bank” may dramatically appreciate, thereby offsetting the cost to the company of exploration and development via farm-out and JV dealings. The Company intends to maintain operatorship and a majority equity interest in such dealings.

Central Petroleum could also take advantage of rising values in its acreage by the sale of some small portions as land values increase.

The company has also announced plans for Allied Resource Partners (ARP) to bring funding and technical expertise from other parties such as “big oil” and sovereign wealth funds to free carry Central through to BFS and project finance on a planned 60,000 bbl/day UCG/GTL project.

It is reasonable to assume that Central may retain some 40-60% equity interest in these various dealings inclusive of some further dilution of the current share capital base of some one billion shares. In this event, the valuation of between $3.6 billion and $4.6 billion would need to be diluted by an equal portion of the relevant project as required.

For example, should Central Petroleum ultimately take a 40% equity interest in each of its long-term resources and projects, this would result in a valuation of between $1.7 billion and $2.1 billion or $1.75 and $2.16 per share based on present value and current shareholdings.

Additionally, as exploration results de-risk the various exploration and development scenarios, and almost inevitably, petroleum product prices rise; this range of valuations could escalate considerably.

There is no separate valuation given here for the long range plans of ARP to assist in the funding of the initial 60,000 bbl/day UCG/GTL proposal as well as a series of additional projects building to a planned 3,000,000 bbl/day output based on the vast tonnages of coal delineated in the Pedirka Basin.

The previous valuation of UCG potential given by Bakers Investment Group was based upon a gross profit before tax of $1.50/gigajoule only by selling gas to a value adding plant and did not include any reference to the profit potential of such plant, which could provide further value to the company.

Conclusion

Based upon a number of publically available reports, which value the potential of Central Petroleum?s various resources and possible downstream additions, we have given Central Petroleum a long-term valuation, for a 5 to 10 year time horizon of between $3.6 billion and $4.6 billion dollars based on a number of key assumptions.

Should any of these assumptions change, this valuation will change, possibly significantly; however we believe that given the current strategy of Central Petroleum to monetise its assets and the various assessments of its resources, that this is a fair valuation range based on currently available information.

Originally published at: http://www.proactiveinvestors.com.au/companies/news/19304/central-petroleum-valuation-of-048-by-bakers-investment-group-19304.html