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 - In today’s report, we focus on Karoon Gas Australia (KAR) that believes in high equity interests, early stage exploration opportunities and large potential targets in proven petroleum systems. Its geotechnical work-up of the early stage exploration acreage, ability to leverage high equity interests to fund exploration and appraisal, and longer term goal to achieve commercialization helps in creating shareholder value. The Company has A$960 million as its market cap with 255.8 million ordinary shares on issue, 11 million unlisted options and A$660 million cash at bank (as at 31 August 2014). The Company has relied on exploration led growth strategy delivering 78% drilling success rate as reported in FY14. KAR has emphasized on less capital intensive and higher returning oil opportunities, and is well funded over the medium term.

As per the latest Kangaroo-2 Appraisal Well progress report (released in January 2015), we note that the Kangaroo-2 Flows Oil at 3,700 stb/d from the Paleocene Reservoirs adding to earlier Maastrichtian Success.


Kangaroo Well is the Most Advanced of Karoon’s Oil Prospects in Brazil (Source – Company Reports)

The well which is located in exploration Block S-M-1165 confirmed a 250 metre gross (135 metre net) oil column in Paleocene and Maastrichtian aged reservoirs. KAR being the operator holds 65% interest in the jointly held Block S-M-1165, Santos Basin with Pacific Rubiales Energy Corp holding the remaining 35% interest. The production testing over the Paleocene A, B and C oil bearing reservoirs has been complete. A side-track program to better define the resource size and recovery factors is to be commenced. The Company conducted production test DST-2A in the Paleocene A, B and C sandstone reservoirs over the intervals 1,663- 1,681 mRT, 1,695-1,729 mRT and 1,735-1,753 mRT with a 12 hour main flow period. KAR achieved a maximum oil flow rate of 3,700 stb/d (stabilised rate of 3,450 stb/d) through an 88/64’’ choke with a flowing tubing head pressure of 270 psia, a gas-oil-ratio of 540 scf/stb. DST-2A produced a 33° API oil with zero CO₂, H₂S, water or sand produced. Production test DST-2 was conducted in the Paleocene C sandstone reservoir over the interval 1,7351,753 mRT. The maximum oil flow rate attained was 2,500 stb/d through a 44/64” choke with a flowing tubing head pressure of 425 psia and a gas-oil-ratio of 450 scf/stb. The well was then flowed on a 40/64” choke at a stabilised rate of 1,820 stb/d with a flowing tubing head pressure of 420 psia, a gas-oil-ratio of 450 scf/stb. At the end of a main 24 hour flow period, the well was shut-in for a 48 hour pressure build-up period. DST-2 produced a 31° API oil with zero CO₂, H₂S, water or sand produced. Given the flow rates achieved in both the Paleocene and Maastrichtian reservoirs, a vertical production well could produce 6,000 to 8,000 stb/d from the combined reservoirs. In addition, horizontal production wells could be expected to produce at higher rates. KAR conveyed that Kangaroo-2 confirmed the indications reported in November of a 250-metre gross oil column, of which 135 metres is assessed as “net” while reflecting a quality to potentially yield commercial flows.


Santos Basin – Kangaroo Field (Source – Company Reports)

Further, the Company reported that the information obtained from Kangaroo-2 will be essential for assessing the commerciality of the Kangaroo oil field and will be valuable for a Front End Engineering and Design (’FEED’) phase bringing the project a step closer to commerciality. Once the operations on the well are completed, the rig will be moved to drill Kangaroo West-1 exploration well and evaluate the prospect ~4.5 kilometres distant on the western side of Kangaroo salt structure. This may materially add to any possible development of the Kangaroo oil field. The exploration and appraisal drilling campaign is expected to continue through first half 2015. The ‘Olinda Star’ semi-submersible rig has been used for drilling the entire campaign.

Noting that the Brent crude oil prices have tumbled, the Company believes that there is recovery expected later in 2015. Nonetheless, benefits are expected from waning rig hire rates and increasing spare capacity in the engineering and construction sector. WorleyParsons carried out pre-FEED work for an oil development at Kangaroo envisioning a floating production ship processing oil gathered through a subsea system. The ship could be leased to reduce upfront costs, which could be funded partly by debt.

In a way, KAR has delivered pleasant news amidst slithering oil prices by virtue of providing healthy production tests. The Company sometime back sold its interest in the Poseidon gas fields to Origin Energy, in order to focus on quicker returns from its Brazil oil acreage. With decent flow rates, the success at the two wells Karoon has drilled so far increases the chances that planned wells in nearby region may also yield fruitful results. The chance of KAR to be able to bring in a partner has increased and that an oil and gas discovery by Spain’s Repsol to the north, known as Piracuca, could be developed in conjunction with Kangaroo and the other prospects. These include the Echidna target, a similar salt-flank play to Kangaroo about 20km to the northeast.


Exploration Pipeline –Tumbes Basin (Source – Company Reports)

For the Tumbes Basin - Block Z-38 wherein KAR has 75% of interests and is the operator while Pitkin Petroleum has 25% interests, exploration drilling is planned to commence 2015 and remains subject to a farm-out.


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

A sneak-peak of the financial highlights entail a cash and cash equivalents balance of $39,013,343 (2013 - $204,519,641) and no debt, as at the end of June 2014. The Company’s working capital increased from $181,192,483 as at 30 June 2013 to $416,963,558 as at 30 June 2014 owing to the exploration and evaluation expenditure carried forward on exploration permits WA-315-P and WA-398-P having been classified as held for sale as the carrying amount will be recovered principally through a sale transaction; and the settlement of the farm-out with Pacific Rubiales. Total liabilities decreased from $346,103,034 to $33,838,630 and total equity increased by $166,633,034 to $766,473,931. Exploration and evaluation expenditure of $289,927,552 (2013 - $359,051,091) was incurred during the financial year, with major expenditure for completion of a total of four exploration wells in the Browse Basin (Proteus-1, Grace-1, Poseidon North-1 and Pharos-1) along with 3D seismic acquisition (Kraken 3D marine survey over the Elvie lead in permit WA-314-P and the Chrysalids marine 3D survey over the western section of the Carnarvon Basin permit WA-482-P) in Australia; preparatory work and planning for the anticipated Kangaroo-2 appraisal well and Kangaroo West-1 exploration well campaign, related studies and completion of the farm-in of exploration block S-M-1352 with Petróbras, in Brazil; and preparatory work and planning for the anticipated two well exploration drilling campaign, in Peru.


Resource Summary for Kangaroo Discovery and Kangaroo West Prospect (Source – Company Reports)

Overall during the past one year, significant developments for the Company have been noted. The world class exploration track record has been realized up to ~A$1 billion in value through asset deals, focused forward program on near term oil opportunities and restructuring of the Board. The medium term strategy for the Company is to grow into a self-funding oil and gas production company. KAR in its latest annual report also specified that it is well-funded and focused on the high impact multi-well oil exploration drilling program targeting ~1.1 billion barrels of oil equivalent net un-risked prospective resource in Brazil, Australia and Peru.




KAR Daily Chart (Source - Thomson Reuters)

We find the overall story quite fascinating, and accordingly, reiterate a BUY recommendation for this stock at the current price of $2.25.

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