Company Overview - Karoon Gas Australia Ltd is an Australia-based oil and gas exploration company. The Company is engaged in the investment in hydrocarbon exploration and evaluation in Australia, Brazil and Peru. The Company operates in three segments: Australia, Brazil and Peru. The Company's Australia segment is involved in the exploration and evaluation of hydrocarbons in two offshore permit areas, such as WA-314-P and WA-482-P. Its Brazil segment is involved in the exploration and evaluation of hydrocarbons in six offshore Blocks, which include Block S-M-1037, Block S-M-1101, Block S-M-1102, Block S-M-1165, Block S-M-1166 and Block S-M-1352. Its Peru segment is involved in the exploration and evaluation of hydrocarbons in two blocks, including Block 144 (onshore) and Block Z-38 (offshore). Its Australian permits cover a combined area of approximately 15,500 square kilometers. Its subsidiaries include Karoon Energy International Pty Ltd, Karoon Gas Browse Basin Pty Ltd and Karoon Gas (FPSO) Pty Ltd.
 

KAR Details
 
Echidna project Update: Karoon Gas Australia Limited (ASX: KAR) has been putting efforts on $3 billion development in Brazil’s offshore Santos Basin which has been proceeding towards a smaller first stage development of Echidna field earlier reported to be sanctioned by the end of 2016. This project has been said to allow the company to leverage the downturn prices on contractors and equipment coupled with benefit from the potential recovering oil prices by the time production starts few years down the line.
 

Santos Basin (Source: Company Reports)
 
KAR has also brought the state-backed oil giant Petrobras’ former upstream director, Jose Formigli, to advise on the Echidna project development. KAR has further employed another former Petrobras executive, Ricardo Abi-Ramia, to manage the project. The planned Echidna appraisal drilling campaign is designed to address certain uncertainties, following which geologic models and the development concept will be refined before considering any future development. Particularly, Karoon has reported for a good data set over Echidna, but some level of uncertainty revolves with only one well drilled and the expectation of some degree of reservoir variability across the field, and an unpenetrated oil?water?contact (‘OWC’). KAR has issued default notices to its joint venture partner Pacific Exploration and Production consistent with its rights under the relevant Joint Operating Agreements (‘JOAs’) for overdue payments. Pacific holds a 35% interest in the Blocks. Hence, both the parties are working together to resolve the issue. During the June 2016 quarter the Echidna appraisal drilling campaign was under review and discussions with joint operation participant Pacific Exploration and Production Corp. regarding the drilling campaign remained ongoing for which an update would be offered later. Further, the company proceeded with pre?FEED work on the potential development of the Echidna discovery including testing the market to update development costs.
 

KAR’s Interests as at 30 June 2016 (Source: Company Reports)
 
Cost Reduction: KAR’s South American Project Development Team had tested the market and found that per well development costs have reduced by over 35% from the estimates provided in September 2015. In addition, the reservoir modelling, development optimization and economic analysis supports the full field development as the optimal base case development concept. The use of extended reach horizontal production wells and combined water and gas injection wells are expected to reduce the number of development wells required from the earlier development concept. 
 

Controlling costs as of June quarter (Source: Company Reports)
 
Appraisal plan approved by ANP:During September 2015, the revised appraisal plan for Karoon's Santos Basin blocks got approved by the ANP. The work program has firm commitments including drilling of two wells, the acquisition and processing of a 3D seismic survey over the full PAD acreage and further geological and geophysical studies, which are required to be completed by 31^st December 2018. Additionally, the final processed Capreolus 3D seismic survey PSDM (pre?stack depth migration) data was received during the June quarter and interpretation of the PSTM (pre?stack time migration) data was ongoing. After the receipt of the PSDM data, there will be joint operation of high quality 3D data covering over 75% of the permit area. This data will be used to interpret and better define, risk and rank identified prospects and leads.
 
Other exploration highlights:The reprocessing of the acquired Kraken 3D seismic is planned to start in the September 2016 quarter. This work is expected to offer a better definition of plays identified and together with amplitude versus offset (‘AVO’) / Quantitative Inversion analysis will allow re?risking of the Elvie prospect. The current geological and geophysical studies, along with the Kraken 3D seismic survey interpretation and thermal maturation modelling, will continue to provide supporting evidence for potentially oil prone hydrocarbon systems being active in the permit area. Moreover, the Tumbes Basin block remained in force majeure and the advanced geophysical studies continued during the June 2016 quarter.  The results of new seismic attribute and AVO analysis have shown positive outcome with clear distinction between water, oil and gas signatures in reservoirs over the 1,500 square kilometer 3D seismic area. The AVO results, along with 3D seismic data and sea floor drop cores, supports the presence of an active hydrocarbon system in the block. The drilling preparations of this project are ongoing.
 
Share buy program would drive the stock further:At the end of June 2016 quarter, the total of 514,945 ordinary shares were bought back and cancelled through the KAR’s on?market share buy?back program. The current outstanding shares on issue are 244,788,468. The share buyback program has brought some support to the stock price which has fallen due to the volatile weak oil price environment. But the group is trying to offset this pressure via its organic growth strategy, and constantly making due diligence reviews throughout the quarter on a number of potential asset acquisition opportunities. Meanwhile, KAR reported a cash balance of $480 million as at 30^th June 2016 with no debt indicating a room for a material acquisition.
 
Timely sale of its interests:KAR has strengthened its capital position from its timely sale of interests in the Poseidon field in WA to Origin Energy for up to $US800m in the middle of 2014 when the oil price was falling. Moreover, New Guinea Energy Ltd. had also made a circa $2.72 million (AUD 3.55 million) investment in KAR, representing over 18% of the company's net assets as at December 31, 2015.
 
Stock Performance:The share price of KAR has fallen over 13.55% in the last six months (as of August 16, 2016) impacted by the volatility in the commodity prices. On the other hand, the average oil price for the June 2016 quarter has increased by 35% as compared to the earlier quarter, which leads to an improvement in scenario of the industry in terms of merger and acquisition activity and project sanctions. This is positive for KAR, particularly with respect to the existing farm?out programs underway, which got renewed fresh interest during the first half of the calendar year 2016. Moreover, the industry?wide development costs have fallen materially as capital expenditure budgets have been slashed, as the industry has been struggling with the lower oil price environment. In Brazil, the largest oil producer, Petrobras, has cut its planned 5-year exploration and production spend, as announced in its Business and Management Plan, by US$74 billion over an 18-month period, i.e. from $154 billion in June 2014 to US$80 billion in January 2016. KAR is also trying to offset its development costs and focusing to cut in capital expenditure plans and reduce the costs. Meanwhile, KAR stock has been consolidating in the last four weeks and rose 4.28% in the last five days (as of August 16, 2016). We believe that the stock has potential to rise as development costs have been decreasing, with FPSOs now being leased at about half the price as compared to two years ago. The group’s buyback program might also support the stock further. Based on the foregoing, we give a “Buy” recommendation on the stock at the current price of $1.38
 

KAR Daily Chart (Source: Thomson Reuters)

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