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Why the Carnavon Petroleum Limited (ASX:CVN) share price is going gangbusters

The hottest small-cap in Australia right now is West Australia-based Carnavon Petroleum Limited (ASX:CVN) after the junior oil explorer updated the market with a string of positive announcements over drilling hits at permitted tenements in WA’s oil rich North West Shelf seabeds.

Today Carnavon revealed additional drilling results at its Dorado-1 well and the group claims it has now discovered a total of 132 metres in net oil pay since first revealing successful hits on July 18.

In response Carnavon’s valuation has nearly quadrupled from 17 cents per share on July 13 to more than 60 cents per share today.

Carnavon Petroleum one-month share price chart. Source: Google Finance 

According to Commsec, Carnavon now has a value more than $500 million, but as an explorer it has no revenues and high costs. In fact in the most recent quarter $5.1 million went out the door, although the group is well funded with $63 million in cash on hand.

The problem for investors is that they’re placing a great deal of reliance on the accuracy of Carnavon’s estimates of hydrocarbon volumes and other forecasts. If these estimates of “truly incredible finds” are sound then the company still has significant obstacles ahead in working to commercialise its drilling efforts.

A June 29 announcement from the company also shows how executives and employees at the company are all financially incentivised to get the share price higher via the issue of shares at 16.5 cents per share, with the shares due to vest over the next five years. They’re off to a good start then ,with the share price having nearly quadrupled since the issue of the shares.

I expect Carnavon will have plenty more positive announcements in the 12-18 months ahead then, but you won’t catch me taking a punt on its shares as management’s unusual incentivisation alone (see Jun 29 announcement for further detail) is enough to put me off.

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Motley Fool contributor Tom Richardson has no position in any of the stocks mentioned.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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