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 Ltd, an international oil and gas exploration company which has projects in Australia, Brazil and Peru looks for interests in early stage exploration opportunities that contain potential targets in basins with efficient Petroleum Systems. Karoon has continued to focus on evaluating a material inorganic opportunity of strategic importance to lay catalysts including farm-out deal for the Echidna/Kangaroo assets and any potential purchase of a producing asset. It has identified and is pursuing high value opportunities; and has even significantly modified its strategy to adopt a multi-pronged approach.

Decent Cash Position: The Group released its half yearly results (ending on 31 December 17) and reported a loss after tax of $28,165,830 as compared to last year’s loss of $8,347,501. This was owing to factors including write-off relating to Peru block Z-38 following demobilisation of a liquid mud plant, inventory carrying value due to changes in well specification on Echidna/Kangaroo, and exploration and appraisal expenditure. As on 31 December 17, the Group still had a cash and cash equivalent balance of $333,889,410; and as at 30 June 17, the same was $375,069,427. KAR had otherwise recorded zero debt. The Group’s working capital (current assets minus current liabilities) decreased from $366,574,781 as on 30 June 17 to $329,039,767 as on 31 December 17 which was due to expenditure in exploration and due to appreciation in the Australian dollar against United States dollar during the financial half-year on cash assets and on security deposits held in United States dollar. Total Assets decreased from $806,569,836 to $766,262,819, total liabilities decreased from $47,677,671 to $39,593,635 and total equity decreased by $32,222,981 and was recorded at $726,669,184.

The financial half-year also included exploration and evaluation expenditure which was expensed of and amounted to $3,541,262 (in 2016, the same was $590,678). This was incurred due to the reviewing of new exploration ventures predominately in Brazil and Peru on business development. It reported an interest income of $171,229 (2016: $482,854) which was earned from the interest-bearing cash assets and security deposits by partially offsetting the loss for the financial half year.  The expenditure on exploration and evaluation amounted to $16,207,772, and was due to the acquisition of a 100 per cent equity interest in Block S-M-1537 (Brazil) and commencement of work for FEED for the Echidna light oil discovery (the expenditure on this amounted to $14,050,369), and continuation of drill planning and logistics at Peru (expenditure on this amounted to $1,772,144).
 

Assets and Liabilities (Source: Company Reports)
 
Review of Operations in different geographies: Brazil remains a focus area and Karoon has utilised its resources from Australia and Brazil so that it delivers the best results and operations update for different segments. In Brazil, the Group completed its assessment of Echidna-1 well results and of sub-surface dataset and elected to progress from the pre-FEED phase of the Echidna light oil discovery along with the preliminary market testing for development of the infrastructure. Its intention is to contract an Engineering Procurement Installation work package for the Echidna development. The Group remains committed to farm down its 100 per cent equity interest in these Blocks (Santos Basin Blocks S-M-1037, S-M-1101, S-M-1165, S-M-1166) before taking any Final Investment Decision. At Peru, Karoon successfully completed the farm-out of a 35 per cent of equity interest to Tullow during January 2018. Both Tullow (international explorer and developer) and Karoon have positive views and have the potential to find a large oil field in this Block (Tumbes Basin Block). The current plan is to drill up to two exploration wells and preliminary well locations have been selected for this purpose. In Australia, Karoon had been planning to acquire 2D seismic data via a multi-client 2D seismic survey over the permit during first half of calendar year 2018. The Operator of exploration permit WA-482-P received the regulatory approval for a variation of the Year 6 work program. The Year 6 exploration well commitment was replaced with a work program that is expected to cost less than $500,000 net to Karoon. When Karoon received the exploration permit of WA-314-P for the reprocessing of the Kraken 3D PSDM seismic data, integration started which allowed a more accurate evaluation for the Elvie prospects. Karoon also implemented some cost saving measures during the financial half-year which included reducing the manpower, office overheads and managing the exploration commitments so that it can focus more resources on production acquisition.
 

Operational Results for different segments (Source: Company Reports)
 
Positive Development for the FEED process: Karoon received an approval for a variation of the existing work program that will help the Group in proceeding to a Declaration Commerciality on Echidna and Kangaroo oil discoveries. The Board of Director of the Brazilian oil and gas regulator approved Karoon Petroleo & Gas Ltda’s application which will help in reviewing the Appraisal Plan, related to the Santos Basin exploration blocks. This will eliminate the appraisal phase commitments to drill two wells and to acquire 3D seismic and it will help in resolving to close the current Appraisal period. Karoon will now present the Final Appraisal Report and will submit a Declaration of Commerciality application on the areas which it intends to retain for the progress of future development. This provides a greater certainty of the future development cost requirements and provides a positive outlook for the current tender process and for the farm-out intentions.


Brazil’s Santos Basin Overview (Source: Company Reports)
 
Outlook for Growth: The Company is looking at every possible way to reduce its cost-base and help save the funds. In fact, in the previous 12-month period, Karoon reduced its staff number by 20 per cent and is currently reviewing its overhead structure. Its aim is to become an oil producer with a robust stable income stream which will support its ongoing exploration led growth strategy and its development activities associated with it. It strives to create shareholder value through the geotechnical work-up of the acreage, by leveraging its high equity interest which will help the Group to explore and appraise these opportunities to achieve commercialisation.

Stock Performance: KAR’s core strategy is to identify the off-shore early stage exploration opportunities, but its long-term strategy is to retain the residual equity interests in the assets as it goes into production. While many oil players have deferred their expansion and development plans as seen in the past, at the back of oil price movement, Karoon has modified its strategy to benefit from the scenario. ROE in 2016 was (11.6%) and the same was (10.1%) in 2017. The stock price was down by 14.7 per cent in the past three months as the developments including the ones at Echidna seem to be discounted by the market. We give a “Buy” recommendation at the current market price of $1.155, in view of the growth prospects, while the stock price dip represents a decent buying opportunity.
 

KAR Daily Chart (Source: Thomson Reuters)

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