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

Positive Santos Basin Update: Karoon Gas Australia Limited (ASX: KAR) is set to proceed to a Declaration of Commerciality on the Echidna and Kangaroo oil discoveries and has received an approval for a variation of the existing work program. The company has announced the positive development in the FEED process for the Echidna light oil development proposal. Moreover, the Board of Directors of the Brazilian oil and gas regulator, Agência Nacional do Petróleo, Gás Natural e Biocombustíveis, has approved Karoon Petróleo & Gás Ltda's application to review the Appraisal Plan relating to Santos Basin exploration blocks - S-M-1037, S-M-1101, S-M-1102, S-M-1165 and S-M-1166. This has removed the appraisal phase commitments to drill two wells and acquire 3D seismic, which is in favor of progressing Echidna and Kangaroo to a future development phase and has resolved to close the current Appraisal period. Further, KAR will now present the Final Appraisal Report and submit a Declaration of Commerciality application on the areas that it intends to retain to progress a future development. The company has issued a Request for Tender to service providers for the proposed Echidna development. The FEED is expected to be ongoing for the first half of 2018. Additionally, the company got approval to vary the work program and remove the drilling and seismic commitments in the Blocks that represented a significant portion of the KAR’s exploration and evaluation commitments. This provides greater certainty of the future development cost requirements while the group is positive for the current tender process and farm-out intentions.
 

Santos Basin Blocks (Source: Company Reports)
 
Macro Dynamics and December Quarter 2017 Focus: In December quarter, there was a step change in short to medium-term sentiment for oil prices after the continued fall in US inventories, strong demand and extension of OPEC’s active market management policy to the end of 2018. The Brent oil price had rallied 16% over the quarter to US$67/bbl, which is up 40% from mid-year. These higher oil prices are expected to lead to increased confidence from potential industry and financial partners on the sustainability of stronger short to medium-term oil prices and ultimately will attract capital back into the industry. On the other hand, KAR evaluated a number of potential production and development acquisition opportunities during the December 2017 quarter. Further, the company had $333.9 million of cash balance as at 31^st December 2017. KAR currently holds almost all its cash in United States dollars.

Exploration and Development Plans: KAR in the December quarter, after the award of Santos Basin Block S-M-1537 from Bid Round 14, executed a concession agreement and a non-refundable bid bonus and refundable work program guarantee bond were paid to the Brazilian oil and gas regulator. The work program for the Block consists of seismic acquisition and geological studies. Moreover, for Ceduna Sub-basin, Great Australian Bight, Permit EPP46 in which KAR has 100% equity interest, KAR’s initial 3-year firm commitment term consists of the acquisition of 2D and 3D marine seismic surveys and geological and geophysical studies. There was decision made for not to proceed with the acquisition of 2D marine seismic data through a multi-client 2D seismic survey during the first half of calendar year 2018. KAR is currently considering revised timing to acquire the seismic data. Further, for Northern Carnarvon Basin, Permit WA-482-P, in which KAR has 50% equity interest, KAR will assess its forward plans for the permit once the Year 6 work program results have been received from the Operator and evaluated. Additionally, for Browse Basin Permit WA-314-P, in which KAR has 100% Equity Interest, the interpretation has commenced that will allow a more accurate evaluation of the Elvie prospect after the receipt of the final reprocessed Kraken 3D marine PSDM seismic data during the September quarter. Overall, KAR had used the downturn to upgrade the exploration portfolio. KAR was successful in being awarded a new area in the Santos Basin of Brazil in bid round 14 conducted by the Brazilian Government. The company’s aim in 2018 is to become an oil producer with a robust stable income stream so as to be able to support their ongoing exploration led growth strategy and associated development activities.
 

Interests in Petroleum Tenements (Source: Company Reports)
 
Farm-out Agreement with Tullow: KAR in the December quarter has concluded months of negotiations and delivered the farm-out agreement of a 35% equity interest in Block Z-38 to Tullow. KAR is excited to be joined by Tullow, which is a company with a long and successful exploration track record. As per the Farm-out Agreement, Tullow will acquire a 35% equity interest in the Block on the terms that include funding 43.75% of the cost of the first exploration well, capped at US$27.5 million (at 100%), beyond which Tullow will pay its 35% share. Tullow will pay US$2 million on the completion, with a further US$7 million payable upon declaration of commercial discovery and submission of a development plan to Perupetro SA (the Peruvian oil and gas regulator). However, the agreement is subject to the satisfaction of certain licencing conditions and regulatory approvals. After the completion of the farm-out well, Tullow will have an option to assume operatorship of the Block. Additionally, while offshore Peru historically had only limited exploration drilling, 2017 saw the industry capital returning into Peru. Thus, the farm-out of an equity interest to Tullow is an important milestone in KAR’s plans to test Block Z-38’s potential.
 

Joint Venture Partner Equity Interests (Source: Company Reports)
 
Acquisition Strategy: KAR is evaluating several acquisitions globally and considers that a successful acquisition of production would be transformational. For acquisitions, KAR is focused on material production assets and is targeting significant underlying cash flows. The company is majorly focusing oil for acquisitions. Moreover, KAR believes that acquisitions are to be driven by geology and potential operational and logical synergies. KAR is geographically focused on regions that have an existing footprint, looking for competitive advantage in evaluating opportunities in Brazil. Further, the company has participated in numerous data rooms over the past 36 months and has reached the preferred bidder status on the Bauna-Tartaruga oil assets. Additionally, the acquisition processes are complex and involve a large commitment in terms of time and personnel. KAR is establishing and considering strategic partnerships. In addition, the industry divestment cycle is expected to continue as portfolios are refocused.

Reducing Cost Base: KAR is also looking at every aspect so that it can reduce its cost base, save funds during what may be a prolonged downturn. In fact, in the previous 12-months’ period, KAR had reduced staff numbers by 20% and is currently reviewing its overhead structure.

Positive World Oil Market Supply Dynamics: Over the past decade the industry has been struggling with declining returns and a pull-back in the oil prices. The industry has responded to the underinvesting of conventional greenfield development and exploration and is focusing on returns and cashflows over volume. There is an increasing investment in short cycle unconventional oil production and commencing a broad disinvestment cycle with a focus on debt reduction. Moreover, the Non-OPEC oil production decline rate is said to remain stable until 2020. Additionally, a lower off-shore cost environment will continue for the medium term (US on-shore conventional industry is likely to experience significant cost inflation). Overall, the healthy global crude demand growth along with growing demand-supply gap is expected to boost the company. The 2018 demand projection is revised higher and the oil price downgrade is reversing.

Stock Recommendation: Meanwhile, KAR stock has fallen 12.7% in three months as on February 27, 2018 while the company has showed exploration capability and success, targeting FID Echidna for the June quarter 2018 and is focusing on acquiring transformational production asset. KAR is looking at innovative ways to get the 100% owned Brazilian discoveries into production by taking advantage of the significantly lower development cost regime, the willingness of service providers to share development risk and the adoption of innovative engineering solutions. Further, the improving industry conditions for farm-outs and drilling is another positive. Trading at low levels, we give a “Buy” recommendation on the stock at the current price of $1.15
 

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.