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

Crossed significant operational milestone during Q4FY17:  The June quarter represented a significant operational milestone for Karoon as the subsurface evaluation and development optimisation work was completed at Echidna to progress into FEED during July 2017. Over the last 18 months Karoon’s South American Development team has been working hard to complete the Echidna reservoir modelling, production scenario analysis, well construction feasibility studies and optimisation work. Importantly, the objective of the work was to deliver a capital efficient, risk-weighted development concept, that can work in the current oil price environment. Moreover, market conditions are supportive with suppliers showing a willingness to consider development solutions which substantially reduce upfront capital commitments with potential solutions including deferred payment structures, equipment financing, subsurface risk reward sharing and/ or equity ownership. During the quarter, cash flows from operating activities stood at $12.3 million, while it was $70.7 million on year to date basis. The company has a cash balance of $375 million as at 30 June 2017.


Schedule of Interests in Petroleum Tenements as at 30 June 2017; (Source: Company reports)
 
Partnering with DEA to jointly bid for oil and gas assets in Brazil: During the quarter, the Brazilian oil and gas regulator Agência Nacional do Petróleo, Gás Natural e Biocombustíveis (ANP) announced new acreage opportunities in Brazil with the launch of Bid Round 14, and the 2nd and 3rd PSC Bid Rounds. Further, key regulatory changes have been implemented to boost the attractiveness of these bid rounds, which include lowering and improving minimum local content requirements and ending Petróbras’ mandatory operatorship of pre-salt acreage. Karoon has a competitive advantage in evaluating opportunities with a significant geological knowledge base and an operational track record in the Santos Basin. Subsequent to the end of the quarter, Karoon entered into agreements with DEA (Deutsche Erdoel AG) to review, evaluate and, jointly bid for oil and gas assets in selected areas offshore Brazil. As part of these arrangements, an exclusive option has been granted to DEA for the acquisition of a non-operated equity interest of up to 50% in Karoon’s five Santos Basin offshore exploration blocks, including the Echidna and Kangaroo discoveries. DEA is a German based international oil and gas company with full lifecycle capabilities, which is owned by a well-capitalised investment company LetterOne Holdings S.A., based in Luxembourg. DEA has excellent operational capabilities with significant production and earnings, along with ambitious growth strategy making them a good strategic fit for Karoon.


DEA capabilities; (Source: Company reports)

Echidna development concept to progress to the next phase: During the quarter detailed reservoir modelling, production scenario analysis, well construction feasibility studies and development optimisation (pre-FEED) for the Echidna development was completed in preparation for the Board to consider concept select. The optimisation work was focused on delivering a capital efficient, risk-weighted development concept for the Echidna oil discovery, that is economically robust in the current oil price environment. During July 2017, the Board approved the current Echidna development concept to progress to the next phase. The Echidna development concept consists of a leased floating production, storage, and offloading facility; 2 extended horizontal production wells and 1 gas injection well with expected peak production approximately 28,000 bbl/day (14,000 bbl/day per production well). FEED is expected to take approximately 9 months and cost less than $10 million, with completion planned during the March 2018 quarter. In order, a final investment decision (FID) is targeted for the June 2018 quarter. During the FEED process Karoon will issue a Request for Tenders to select suppliers with the intention of contracting an Engineering Procurement Construction and Installation (EPCI) work package for the Echidna development. The dramatic oil industry pulls back over the past 3 years has led to lower vessel utilisation rates and higher equipment inventory levels, globally and in Brazil. This cyclical downturn has presented a window of opportunity in which Karoon expects to receive tenders that provide significant funding flexibility.


Echidna Appraisal Well Locations; (Source: Company reports)

Ceduna Sub-basin in Australia: Karoon’s initial 3-year firm commitment term consists of the acquisition of 2D and 3D marine seismic surveys and geological and geophysical studies. It is planning to acquire 2D marine seismic data via a multi-client 2D seismic survey over the permit during the first half of calendar year 2018, while tenders have been received and are currently being evaluated. In nearby GAB permits, Chevron has a commitment to drill 4 exploration wells before November 2018 in the 2 blocks immediately to the west of Karoon’s exploration permit EPP46, Statoil has a 1 well exploration drilling commitment in permit EPP39, due to be completed before November 2019.


Ceduna Basin - EPP46, Australia; (Source: Company reports)

Carnarvon Basin, Permit WA-482-P: During the quarter, charge modelling studies over the permit were completed to better understand the risks associated with effective hydrocarbon charge for the mapped structures. The charge modelling results, along with the ongoing analysis of the extensive high quality seismic dataset across over 75% of the permit and the Levitt-1 well results being integrated into the geological model. This work will underpin a further risk analysis and ranking of the prospects in the permit. Further geological and geophysical studies are required to better understand these prospects prior to any further consideration of exploration drilling.


Carnarvon Basin, Australia; (Source: Company reports)

Progress at Browse Basin and Tumbes Basin:  Reprocessing of the Kraken 3D marine PSDM seismic data was ongoing during the quarter at Browse Basin. The final reprocessed data is expected to be received during the September 2017 quarter with interpretation work to follow. Further interpretation work, along with support of AVO/ Quantitative Inversion analysis, will allow re-risking of the Elvie prospect. At Tumbes Basin, Block Z-38, the drilling preparations were ongoing, while the Marina-1 exploration well location was reviewed to incorporate the additional younger reservoir targets identified in the seismic attribute analysis in the well plan.


Tumbes Basin, Peru; (Source: Company reports)

Continuous evaluation of acquisition opportunities: During the quarter Karoon continued its evaluation of several potential production and development acquisition opportunities along with new exploration and appraisal opportunities that provide strategic synergies. With respect to the Baúna and Tartaruga Verde oil projects that were included in the Petróbras asset divestment program, Karoon was advised at the time that the previous sales process was withdrawn. However, Petróbras intends to reinitiate the sales process relating to these assets and Karoon remains committed to participating in any future process relating to these assets. Reinitiating a sales process under Petrobras’ revised methodology is expected to reduce the risk of any future court action against a potential sale and provide greater certainty for the successful bidder.
 
Recommendation: The stock has fallen 27.7% in the last six months (as on August 09, 2017), due to hurdles from the Federal Court of Sergipe regarding KAR’s 100% operated interest in concession BM?S?40, the Bauna oil project, and a 50% non?operated interest in concession BM?C?36. However, the group’s Echidna discovered oil resource appraisal promises a potential development opportunity to leverage the falling development costs and capitalise on current market conditions. Notably, KAR is aiming at peak production approximately 28,000 bbl/day (14,000 bbl/day per production well).  Further, the framework co-operation agreement with DEA is significant in the context of realising Karoon’s strategic ambitions to acquire meaningful oil production in Brazil as it is focusing on exploration opportunities at highly prospective acreage with multi-year tenure. Given the ongoing project developments and company’s initiatives to sustain in the low oil price environment, we give a “Buy” recommendation on the stock at the current market price of $1.230
 

KAR Daily chart; (Source: Thomson Reuters)
 

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