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
 
Karoon Gas Australia Limited (ASX: KAR), which has a proven track record of exploration success, is expected to witness a catalyst driven phase in near term given the updates on FEED at Echidna and any farm-in option ahead of a planned final investment decision around mid CY18. The recent acquisition of a Santos Basin block seems to be a cost-effective option on further exploration success for KAR. While KAR reported for a net loss of about $82m in FY17, the group aims to deliver a better performance going forward with various levers falling in place.

Awarded Southern Santos Basin Exploration Block: Karoon has continued to explore several potential production and development acquisition opportunities, apart from the new strategic exploration acreage opportunities. The group snapped up the southern Santos Basin Exploration Block S-M-1537 during September quarter 2017. In June 2017 quarter, the ANP had launched Bid Round 14, which opened up new acreage opportunities in the southern Santos Basin, offshore Brazil. The southern Santos Basin Exploration Block is located at the current oil and gas producing province, which includes the Bauna and Piracaba oil fields. The Block lies offshore in the state of Santa Catarina, to the south of Rio de Janeiro, covering 171 sq km with a water depth of over 400 meters. Moreover, the group has a major competitive advantage in the evaluation of new exploration opportunities in the southern part of the Santos Basin, and has built a solid technical and operational experience in the area in the last decade. The group would benefit from operational and logistical synergies from the current blocks and any potential development of the Echidna light oil discovery.

KAR expects that Block S-M-1537 would offer an exciting exploration opportunity, with the potential for hundreds of millions of barrels of oil. The main lead is targeting Oligocene turbidite sands with excellent reservoir porosity and permeability as seen in the producing Oligocene reservoirs of the Bauna and Piracaba oil fields. The seismic analysis gives encouraging amplitude as compared to offset anomaly supportive of the presence of trapped oil. However, more geoscience work is required to define the target size and risk ahead of future operational decisions. The group looks forward to completing the acquisition of Block S-M-1537 during the December 2017 quarter post executing a concession agreement in Brazil, and would pay a total of $8 million in a non-refundable bid bonus while offering a refundable work program guarantee bond to the ANP worth $2.5 million. This work program is said to comprise seismic acquisition and geological studies.
 

Map of the Block S-M-1537 Area (Source: Company Reports)
 
Agreements with DEA:During the September quarter, the group inked agreements with DEA (Deutsche Erdoel AG) to review and evaluate and, to jointly bid for oil and gas assets in selected areas offshore Brazil. As part of these arrangements, an exclusive option, subject to satisfactory due diligence and agreement of terms, has been granted to DEA for the acquisition of a non-operated equity interest of up to 50% in Karoon’s five Santos Basin Blocks, including the Echidna and Kangaroo light oil discoveries.

Brazil Operations’ highlights:Management approved the Echidna light oil discovery to progress into Front End Engineering and Design (’FEED’), which would move the project a step closer to a possible development. The proposed development concept consists of a leased floating production, storage and off-loading facility, and 2 extended horizontal production wells and 1 gas injection well. The peak oil production is expected to reach a total of over 28,000 bbl/day. The tender documents were prepared and finalized during the September quarter, to issue a Request for Tender to select suppliers for the proposed development of Echidna. The FEED phase is forecasted to take over 8 months and incur costs of over $10 million. The FEED Phase is specifically expected to be finished by the March 2018 quarter while a final investment decision (‘FID’) is marked for the June 2018 quarter. The group now aims to contract an Engineering Procurement Construction Installation work package for the Echidna development.

Progress on Other Projects: For Ceduna Sub-basin, Great Australian Bight, Permit EPP46 (in which KAR has 100% Equity Interest), the group is planning to acquire 2D marine seismic data through a multi-client 2D seismic survey over the permit. The 2D marine seismic data is expected to be acquired via a multiclient 2D seismic survey over the permit during the first half of the year 2018. The group sees a high impact opportunity given the geology, potential target size and surrounding exploration activity adding to the exploration portfolio. The tenders have been evaluated while a final decision is expected during the December 2017 quarter. Moreover, for Northern Carnarvon Basin, Permit WA-482-P (wherein KAR has 50% Equity Interest), Quadrant (as Operator of the exploration permit) got the regulatory approval for a variation of the Year 6 work program during the September quarter. The Year 6 exploration well commitment was replaced with a work program that is forecasted to cost less than $500,000 net to Karoon, consisting of 400 sq km full waveform inversion PSDM seismic reprocessing, Quantitative Interpretation/Inversion studies on the reprocessed seismic, fault seal analysis and G&G studies including seismic interpretation. Additionally, for Browse Basin, Permit WA-314-P, the group got the final reprocessed Kraken 3D marine PSDM seismic data showing a considerable improvement in the quality. The interpretation of the new data would enable KAR to make a more accurate evaluation of the Elvie prospect.Additionally, KAR in the September quarter reported for encouraging discussions with the Peruvian oil and gas regulator, Perupetro, and its joint operation partner with respect to refining the third period term work program obligations. At the Tumbes Basin Block Z-38, the group started advanced geophysical and AVO studies using existing 3D seismic data, while the results were found to be positive.
 

Oil Discoveries at Santos Basin (Source: Company Reports)
 
Improving Outlook of the Industry:Global oil market was seen to be facing challenges over supply and weaker demand during 2016-2017. Despite the recovery in the oil and gas market from the early part of 2016, the momentum was seen losing track through to 2017. Even though OPEC and Russia’s combined efforts to normalise high oil inventories through active market management were seen, the negative sentiment continued at the macro level. In fact, the oil price outlook was shaped by the resilience and speed of recovery in United States onshore oil production along with rising supply from Libya, Nigeria, Iraq and Iran. To withstand the mounting pressure, the group continued the focus on cash positive development and production opportunities to offer base cash flow in the medium term. KAR also pursued for opportunities to identify and evaluate development and production assets. The group built a solid balance sheet to leverage the selected acquisition opportunities that come up for sale. On the other hand, during the September quarter, the Brent price increased by 20%, the 2018 forward curve moved up by 10% and US oil inventories fell 8%. The Brent price has been seen to trade above US$60 per barrel for the first time since July 2015. This is positive for Karoon which promises improving market sentiment on the oil price. Moreover, KAR expects deployment of further capital into exploration, appraisal and development opportunities over the short to medium-term.
 

Exploration Blocks (Source: Company Reports)
 
Stock Performance: KAR stock has fallen 34.4% this year to date as at October 31, 2017 and rose about 1% on November 01, 2017. The group has $352 million cash balance as at September 30, 2017. KAR currently holds most of its cash in United States dollars. The company is evaluating a number of potential production and development acquisition opportunities while the overall sentiment in the industry is expected to improve in the coming months. We believe that the subdued levels of the stock can be leveraged as an investment opportunity given the group’s organic growth ambitions and diversified portfolio of prospects. We give a “Buy” recommendation on the stock at the current price of $1.21
 
KAR Daily Chart (Source: Thomson Reuters)

Disclaimer
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.