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
Setting to circumvent hurdles regarding Brazil assets’ acquisition: Karoon Gas Australia Limited (ASX: KAR) had earlier reported that they were considering a possible acquisition deal for entire interest in the Baúna oil project and a non?operated 50% interest in the Tartaruga Verde oil development with Petróleo Brasileiro S.A.(Petrobras). However, Mr. José Hunaldo Nunes Santos initiated court proceedings in the Federal Court of Sergipe in October 2016 against Petrobras and Karoon Gas claiming that the correct sale procedure was not followed while considering the acquisition. Lately, the group was also advised that Petrobras’ appeal to lift an injection on suspension of potential sale, got rejected by Federal Court of Sergipe. On the other hand, Petrobras reported that their sales process followed compliance. The group is considering to offload their assets as a part of their divestment target to achieve over US$35 billion of assets between 2015?2018, and decrease their debt. Meanwhile, the Brazilian Federal Court of Accounts suspended any further sale of assets by Petrobras, barring five projects which are in the final stages of negotiation. KAR has been advised that Baúna and Tartaruga Verde assets are among those five assets which are said to be not under any suspension by Brazilian Federal Court of Accounts. The litigation might continue against Petrobras, the ANP (Brazil’s oil and gas regulator) and KAR, by the affiliate of the oil tankers union. KAR is required to submit its defense in February. It is worth noting that Petrobras in 2016 faced down a legal challenge with regards to the sale of Gaspetro and could emerge successfully out of it. Further, Total/Petrobras deal also, to some extent, indicates for Petrobras’ confidence in beating such injunctions. We expect KAR to close its transformational deal with Petrobras.
 
Received Exploration permit for EPP46: The group got the Exploration permit for Ceduna Sub-Basin, EPP46, which is the core prospective and active frontier oil exploration province. The group expects A$26 million which includes 2D and 3D seismic acquisition for a three-year firm commitment. The preliminary geological studies are underway, while 2D seismic acquisition is proposed during the first half of 2018. Given the group’s track record of high standards, they expect to minimize the impact on the environment and local fishing industry in the area. Meanwhile, the group is clearing the way forward for Echidna Appraisal Campaign in the Santos Basin. Their joint venture partner, Pacific Exploration and Production Corp. filed for insolvency protection in April 2016. As a result, the group acquired Pacific’s 35% interest for up to US$20.5 million, which is US$0.45/bbl 2C contingent resource. Karoon is planning for a Farm-out before the appraisal drilling. The group is planning two-well Echidna appraisal campaign in this year to leverage the lower utilization rates and volatile cost environment. The group believes that further discoveries at Kangaroo and Bilby would offer possible tie back opportunities.

 

Karoon Oil Discoveries at Santos Basin (Source: Company Reports)
 
Highlights on other assets: In Australia, the group’s Carnarvon Basin, Permit WA-482-P (KAR has 50% interest and is a non-operator) has high quality 3D data covering over 75% of the permit area post the receipt of the PSDM (pre?stack depth migration) data during the June 2016 quarter. Seismic interpretation, hydrocarbon charge modelling and amplitude versus offset (‘AVO’) analysis was forecasted to finish by the second half of the year. As per the Browse Basin, Permit WA-314-P (wherein the group has 100% Interest with KAR being the operator) reprocessing of the acquired Kraken 3D marine seismic was started. With this work, better definition of plays has been expected to be identified, and with the support of AVO/ Quantitative Inversion analysis, the re?risking of the Elvie prospect would be possible. Earlier studies showed evidence for potentially oil prone hydrocarbon systems being active in the permit area. With regards to the Peru Tumbes Basin, Block Z-38, wherein KAR has 75% Interest, advanced geophysical studies are being conducted during the quarter. The results of new seismic attribute and AVO analysis are positive indicating a major difference between water, oil and gas signatures in reservoirs in several prospects of the 1,500 square kilometre 3D seismic area. These AVO results, along with 3D marine seismic data and sea floor drop cores enhanced the case for the presence of an active hydrocarbon system in the block. Drilling preparations have also been underway. At Marañón Basin, Block 144 the group’s geotechnical, social and environmental work was reported to be progressing well.

 

Mapping and Seismic Attributes (Source: Company Reports)
 
Other initiatives: Under Karoon Gas Australia’s forward program, the group intends to continue their efforts in enabling the Echidna resource to a final investment decision during 2017 / 2018. Two-well Echidna discovery appraisal campaign, is forecasted to start this year while FEED studies are expected to start after the Echidna appraisal, aiming for successful FID. For Tumbes Basin, Peru, the group intends to Farm-out and start the final drilling preparations for the initial exploration wells. KAR intends to continue amplitude work as compared to offset work over the prospects. At Carnarvon Basin, Australia, the group would finish the Chrysalids and Capreolus 3D seismic data interpretation. The group would also rank and risk identified prospects before any more exploration drilling. As per the Ceduna Sub-Basin, Australia, the group intends to start the regional technical studies as well as is planning to start seismic data acquisitions.
 
Capital position: Karoon Gas had reported for a $449 million cash balance as at 30 September 2016 with no debt. As a result, the group intends to leverage their decent capital position as well as a subdued oil price environment to consider acquisition opportunities building production assets. The group also bought back a total of 514,945 ordinary shares during the September quarter as a part of their on?market share buy?back program. The group has outstanding ordinary shares on issue of 244,938,805. Meanwhile, KAR had appointed Ms Luciana Rachid as an Independent Non?Executive Director. KAR intends to leverage the declining development costs to develop their assets. In Brazil, the production wells, completed and connected fallen by 35% to ~US$90 million per well from 2015 (as per the groups estimates). Even Injection wells, completed and connected fallen by 24% to over US$75 million per well. Accordingly, the Operating expenditure is forecasted to reach US$350kpd as compared to ~$400kpd on the back of declining logistics and off-shore support vessel costs. 

 

Intends to leverage cost deflation (Source: Company Reports)
 
Stock performance: KAR stock fell over 21.8% in the last three months (as of January 24, 2017) partly due to hurdles from the Federal Court of Sergipe regarding KAR’s 100% operated interest in concession BM?S?40, the Baúna oil project, and a 50% non?operated interest in concession BM?C?36, the Tartaruga Verde oil development project from Petrobras. On the other hand, the group reported that this next stage of negotiation would take almost twelve months of a competitive bidding process. Despite this issue, the group’s Echidna discovered oil resource appraisal and promises a potential development opportunity. To leverage the falling development costs environment, the group believes on a full field development without using an Early Production System. KAR is aiming at a peak production of over 30kbopd from Echidna. The group is also focusing on exploration opportunities at highly prospectiveacreage with multi-year tenure. KAR is even looking at refining their current portfolio. The group’s intention to relinquish Block 144 might start before this year end. KAR stock delivered a decent return in the medium term and rallied over 33.7% in the last six months (as of January 24, 2017). We believe that momentum in the stock will be seen with some support from recovery in the commodity prices. We give a “Buy” recommendation on the stock at the current price of – $ 1.83

 
KAR Daily Chart (Source: Thomson Reuters)

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