Company Overview - Karoon Gas Australia Ltd (Karoon Gas) is an Australia-based exploration company. The Company is principally engaged in the hydrocarbon exploration and evaluation in Australia, Brazil and Peru. The Company operates in three segments: Australia, Brazil and Peru exploration. The Company’s Australia segment is involved in the exploration and evaluation of hydrocarbons in four offshore permit areas: WA-314-P, WA-315-P, WA-398-P and WA-482-P; The Company in its Brazil segment is involved in the exploration and evaluation of hydrocarbons in five offshore blocks including Block S-M-1037, Block S-M-1101, Block S-M-1102, Block S-M-1165 and Block S-M-1166. The Company under its Peru exploration segment is involved in the exploration and evaluation of hydrocarbons in two blocks in Peru, including Block 144 (onshore) and Block Z-38 (offshore).


Analysis - Karoon Gas (KAR), the international  oil and gas exploration player, has elucidated its performance progress through recent updates that entail multiple oil bearing zones encountered at Kangaroo-2 appraisal well; recovery of oil from five separate reservoirs within the Palaeocene (formerly, Eocene) and the Maastrichtian formations; recovery of oil that includes 17 samples, estimated 40 degree API, Gas Oil Ratio (GOR) of 400 to 700 standard cubic feet per barrel (scf/bbl); and confirmation of 250 metre gross and 135 metre net reservoir pay by wireline petrophysical logging and sampling. Drilling was complete at a total depth of 2,369 metres below rotary table and a wireline logging program was underway, as on 25 November 2014.


Operation Locations (Source – Company Reports)

FY14 was seen to be a historic year for the Company with a stupendous exploration track record realizing up to about A$1 billion in value through asset deals, forward program on near term oil opportunities and restructured Board. The Company reported a loss after tax of $5,518,780 in 2014 ($10,930,403 in 2013), which was partially offset by interest income of $5,595,155 earned on interest bearing cash assets and security deposits and net foreign currency gains of $1,100,817. At the end of June 2014, KAR reported to have a cash and cash equivalents balance of $39,013,343 ($204,519,641 in 2013) and no debt. The market capitalization of the Company was $785 million as at 30 June 2014 (30 June 2013 - $1.127 billion) and about A$1 billion as at September 2014. KAR intends to pay future dividends during financial periods when appropriate to do so.

An overview of the reservoir-related updates reveal that the five separate oil bearing reservoir sand intervals over the interval 1,660mRT to 2,000mRT in the Palaeocene and Maastrichtian age formation have been penetrated with each interval having a separate oil/water contact. The gross oil column thickness totals 250 metres.


Looking at the Palaeocene section, KAR reported that the section contains a 90 metres gross oil bearing reservoir with a net to gross over 70% and porosities in the range 26%-34%. Three separate oil columns are found. The identified Palaeocene oil accumulations are separate from the ones of Kangaroo-1.

The Maastrichtian section is found to have two oil bearing reservoirs - an 85 metre gross oil bearing reservoir interval with a net to gross over 60% and porosities in the range 22%-26% at the top of the section, and an oil bearing reservoir interval with a thickness of 75 metres, a net to gross of 25% and porosities in the range of 21%-25% at the lower section. Oil recovered from said reservoirs is estimated to be 40 degree API with a GOR range of 550–700 scf/bbl.

Under KAR’s forward looking program, the Company stated completion of wireline logging to be over the coming days. Further, a production test is planned with an option to sidetrack and core being considered subject to final logging results. Operations on the well are expected to be completed within coming few weeks, which will be before the drilling by the rig and evaluation of the Kangaroo West prospect about 2 kilometres distant on the western side of Kangaroo salt structure.


Santos Basin – Well Locations (Source – Company Reports)

The Kangaroo-2 appraisal well which is located in block S-M-1165, is about 300 metres up-dip and 4 kilometres South from Kangaroo-1. This well has been marked as the first well in the current Santos Basin exploration and appraisal drilling campaign. The related information appears to be crucial for assessing the commercial prospects of the Kangaroo oil field. Further, it will set the base for the Front End Engineering and Design (FEED) phase in view of commercialization aspects. The Company at present holds a 65% interest in, and is operator of the jointly held S-M-1165 block in Santos Basin.

As per the September 2014 updates, the exploration led growth strategy is delivering 78% drilling success rate in last 24 months from 9 wells with Browse Basin Poseidon gas resource monetized for up to US$800 million. Kangaroo oil discovery appraisal is planned for December Quarter 2014.

The exploration and appraisal drilling campaign by KAR is expected to continue through 1H 2015. In addition, the rig contract provides the Company with 2 firm wells plus 2 option wells. It is expected that fruitful drilling in the first 2 wells will proffer maximum flexibility for further appraisal of the Kangaroo oil discovery. The second firm well in the program is the Kangaroo West-1 exploration well, which owing to its large size and potential success may add to the prospect of Kangaroo oil field. Results of the Kangaroo-2 confirm the viability of the salt flank play.  KAR updated that the ’Olinda Star’ semi-submersible drilling rig is used for the entire drilling program.


Browse Basin, Australia (Source – Company Reports)

We note that the oil and gas sector remains in an asset divestment phase that in-turn has affected KAR’s farm-out deals in FY14 to some extent. Nonetheless, strategic decisions such as the decision to divest KAR’s most advanced asset - the Poseidon gas resource (Browse Basin exploration permits WA-315-P and WA-398-P) has been an important one in view of balancing various risks. An important step herein, of monetization of the two Browse Basin permits and exclusion of the potential LNG project capital expenditure outcrop has led KAR to unveil a capital management initiative to return money to shareholders.



Total Shareholder Composition (Source – Company Reports)

Recently, the Company selected an on-market share buy-back as a mechanism to return surplus capital to shareholders. A share buy-back will result in a reduction of the ordinary shares on issue, increasing the per share exposure for all shareholders to the upcoming appraisal of the Kangaroo oil discovery along with the planned 18 month exploration program across the Santos, Carnarvon and Tumbes Basins.

The Company is well funded and is emphasizing on the appraisal of the Kangaroo oil discovery and the planned multi-well oil exploration drilling program targeting approximately 1.1 billion barrels of oil equivalent net un-risked prospective resource in Brazil, Australia and Peru. The drilling program includes the first phase exploration drilling programs in the Carnarvon and Tumbes Basins. In the Carnarvon Basin permit WA-482-P, the Levitt prospect was selected as the first exploration well drilling location which indicated impressive exploration led growth. The Company has also completed 2,704 square kilometres of marine 3D seismic acquisition in Australian exploration permits WA-482-P and WA-314-P.


Carnarvon Basin – WA-482-P (Source – Company Reports)

The Company announced the sale of its 40% equity interest in exploration permits WA-315-P and WA-398-P, which includes the greater Poseidon resource, to Origin for up to US$800 million and the reimbursement of costs paid by KAR associated with the final well, Pharos-1, in June 2014. ConocoPhillips also informed KAR about its intention to withdraw from exploration permit WA-314-P. Transfer documentation was signed by both parties and Karoon assumed ConocoPhillips’ 10% interest in the permit for $Nil consideration, taking KAR’s interest to 100%. In May 2014, KAR farmed out a 50% interest in WA-482-P to Apache Northwest Pty Ltd for an upfront payment of US$9 million with Apache committing to cover 90% of the cost of one exploration well up to US$70 million. Apache thus became the Operator and is committed to drill the first exploration well during 1H of calendar year 2015.


Karoon Daily Chart (Source - Thomson Reuters)

KAR has indicated that its longer-term strategy is to retain residual equity interests in the assets as proceeding into production while the core strategy revolves around identifying off-shore early stage exploration opportunities.

Accordingly, we put a BUY recommendation for the stock at the current price of $2.73.

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