Company Overview: Karoon Gas Australia Ltd is an independent oil and gas company. The Company is engaged in investing in hydrocarbon exploration and evaluation in Australia, Brazil and Peru. Its segments are Australia, Brazil and Peru. The Australia segment includes exploration and evaluation of hydrocarbons in two offshore permit areas: WA-314-P, which is located in Browse Basin, and WA-482-P, which is located in Carnarvon Basin. The Brazil segment includes exploration and evaluation of hydrocarbons in five offshore blocks: Block S-M-1037, Block S-M-1101, Block S-M-1102, Block S-M-1165 and Block S-M-1166, which are located in Santos Basin with gross acreage of over 550 square kilometers. These blocks are located approximately 200 kilometers from the coastline of Santa Catarina. The Peru segment includes exploration and evaluation of hydrocarbons in two blocks: Block 144 (onshore), which is located in Maranon Basin, and Block Z-38 (offshore), which is located in Tumbes Basin.

 
KAR Details

ANP approved Declaration of Commerciality for Neon (Echidna) and Goia (Kangaroo): Karoon Gas Australia Limited (ASX: KAR) is into the exploration of natural gas and hydrocarbons in Australia, Brazil and Peru. The Company's key exploration activities comprise the Browse Basin (Western Australia), Bonaparte Basin (Northern Territory), Tumbes Basin (Peru), Maranon Basin (Peru) and the Santos Basin (Brazil). The core strategy of the company is to look for off-shore early-stage exploration opportunities while the longer-term strategy entails having residual equity interests in assets with phasing into production. Recently, KAR received approval from ANP, Agência Nacional do Petróleo, Gás Natural e Biocombustíveis for the Final Discovery Evaluation Report (RFAD) for wholly owned Santos Blocks S-M-1037, S-M-1101, S-M-1102, S-M-1165 and S-M-1166 along with a Declaration of Commerciality (DoC), with regard to the Kangaroo and Echidna discoveries, Santos Basin Brazil. The RFAD and DoC documents were submitted in early May to ANP - Brazilian oil and gas regulator. These documents cover information about two distinct areas that have been identified for retention; and these regions include Echidna and Kangaroo oil accumulations as well as entail near field prospective resource opportunities. Under the Declaration of Commerciality, field names in different blocks are provided in relation to marine organisms. With this approval on RFAD and DoC, KAR’s Exploratory Phase has reached to an end while the group has geared up for Development and Production Phase. While marking the commencement of Development and Production Phase, the approval still excludes any reference with regards to final investment decision (‘FID’). The group stated that a relevant FID has to be assessed by KAR independently and the company is expected to be a in position to decide on FID later in 2018.


Neon (Echidna) and Goia (Kangaroo) (Source: Company Reports)

Corporate Updates during June 2018 Quarter: KAR as at 30 June 2018 has cash balance of $333.6 million; and KAR currently holds almost all its cash in United States dollars. During the June 2018 quarter, Petróbras had relaunched the Baúna oil field sales process. This asset remains an opportunity of interest for KAR and due to the proximity to KAR’s existing acreage position if acquired, would provide the possibility for significant operational synergies. The company continues to evaluate the production and development acquisition opportunities, along with new strategic exploration acreage opportunities. KAR’s production and development acquisition strategy is focused on (but not limited to) offshore opportunities in Brazil where the company has an operational presence. There are currently a number of acquisition opportunities due to the Petróbras asset divestment program, along with divestments from other non- Petróbras companies. Further, KAR is in advanced discussions with oil and gas companies relating to jointly evaluate the opportunities in the southern Santos Basin. Meanwhile, during the June quarter the joint bidding agreement with DEA Deutsche Erdoel AG ended.

Operational Performance for June 2018 Quarter: During the June quarter, in Santos Basin, KAR left Block S-M-1166 and retained two distinct areas that encompass the Echidna and Kangaroo discoveries along with some near field prospective resource opportunities. The company has renamed Echidna and Kangaroo discoveries for local convention. As each accumulation straddles two blocks, they have two corresponding names. Echidna has been renamed Neon and Neo Sul (‘Neon’) and Kangaroo has been renamed Goiá and Goiá Sul (‘Goiá’).


Resource Update at Neon and Goiá (Source: Company Reports)

Development Plan: KAR has been continuously working on a development plan for both Neon and Goiá, which is due for submission to the ANP during the December quarter 2018. KAR is expecting bids for an OPEX focused solution to reduce upfront CAPEX of a development. The concept development plan includes two optimally located long horizontal production wells aimed at accessing a large portion of Echidna’s Contingent Resources. Currently, KAR is in advanced discussions with interested companies to jointly evaluate all opportunities in the southern Santos Basin. KAR is working with these companies to optimise the proposals. Further, KAR was awarded Block S-M-1537 in Santos Basin, for which the company has undertaken geological and geophysical studies of the Block. During the quarter mapping work of the area was ongoing. This Block contains one main prospect with the reservoir comprising Oligocene turbidite sands, which is expected to have very high porosity and permeability, as seen in the producing Baúna and Piracaba fields. In Tumbes Basin, Peru, after the farm-out to Tullow Oil Plc (‘Tullow’), the company has focused work on the Marina Prospect, which is the most likely drilling candidate, in preparation for the necessary planning and documentation required for Government and joint operation approvals. KAR has commenced ocean state modelling during the June quarter with the installation of 10 buoys around the Marina Prospect. This reflects the beginning of formal operational preparations for drilling. KAR is working with the regulators and Tullow to get the relevant regulatory approvals for their entry into the Block. After the ongoing geological and geophysical interpretation and analysis, updated internal management estimates of prospective resource volumes were announced during the June quarter which show the addition of the shallower La Cruz and Mal Pelo formations. In Ceduna Sub-basin, Great Australian Bight, Permit EPP46, KAR along with its stakeholders is in preparation for the seismic acquisition. KAR is currently considering revised timing to acquire the seismic data given the current scenario due to the lack of Government approvals obtained to progress work by other permit operators in the recent period.

Exploring farming-out opportunities: During the June quarter, KAR has initiated discussions with interested parties on the possibility of farming out an interest in the Permit EPP46. Additionally, after the acquisition and interpretation of the Capreolus 3D marine seismic survey data, KAR now has a high-quality 3D data set covering 82% of the permit area which has been used to better define, risk and rank 10 significant prospects. The nearby Dorado oil discovery gives a lot of encouragement to KAR. The Triassic source rocks that underlie the Dorado, Phoenix and Roc oil and gas discoveries are also interpreted beneath WA-482-P. The company is working to understand the implications of the Dorado oil discovery on the prospectivity of WA-482-P. KAR plans to assess its forward plans for the permit once the Year 6 work program results have been received and evaluated from the Operator. In addition, during the June quarter, the preparations have commenced to farm-out an interest in the Browse Basin, Permit WA-314-P, utilise the results of reprocessing on the Kraken 3D dataset and previously acquired 2D datasets.  Montara level prospectivity has been enhanced by this new work. KAR’s continued presence in the permit is subject to industry interest in progressing exploration. The decision on whether to proceed into the next period will be made during the 2018 December half year.


Estimated costs for next quarter post June (Source: Company Reports)

Resources Update: KAR has revised its estimates of Contingent Resources in its Brazil Echidna and Kangaroo oil fields and Prospective Resources in Peru block Z-38 and Australian block WA-482-P due to new data analysis and interpretation. The updated Contingent Resource estimates for Echidna and Kangaroo comprises reprocessed seismic interpretation and core lab data analysis. The company has updated Prospective Resource estimates in Peru block Z-38. Gross (100%) ‘Best’ case Prospective Resources are estimated at over 1.3 billion barrels on an un-risked basis. The revised estimates are lower than previously reported estimates, but have lower geological risk and were critical to securing Tullow as a farm-in partner in February 2018 ahead of drilling in 2019. The revised estimates in Australian permit WA-482-P after interpretation of new 3D seismic data have resulted in Gross (100%) ‘Best’ case Prospective Resources of 2.8 billion barrels of oil.


Low Cost entry Opportunity at Ceduna (Source: Company Reports)

Appointment of Key Personnel: KAR has appointed Mr. Peter Turnbull as the Interim Chairman of the company from 15 August 2018. This decision has been taken after the unfortunate passing of Dr. David Klingner. The company will be conducting a thorough process to appoint a permanent replacement. After the appointment of Mr. Turnbull, KAR’s Board will comprise of a total of seven Directors including four independent Non-Executive Directors (including the Interim Chairman), one Non-Executive Director and two Executive Directors.

Stock Recommendation: Meanwhile, KAR stock has risen 5.8% in three months as on August 03, 2018. KAR’s strategic vision is to transform into a global Exploration & Production (E&P) company with significant production supported by a highly prospective exploration portfolio. The group’s revenue and profits need an uplift but earnings quality for the last year has improved a bit with rise in operating profit margin. However, cash flow from operations is still in the negative zone. Looking at the scenario and vouching for growth, KAR  is focused to acquire significant production assets and also focusses on first class oil producing assets with strong future cash flows. KAR plans to review sales processes where strategic opportunity exists (Bauna/Piracaba close to Echidna). Based on the foregoing developments amid the latest downtrend noted for oil prices, we give a “Buy” recommendation on the stock at the current price of $ 1.180, which represents a low level.


KAR Daily Chart (Source: Thomson Reuters)

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