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 is known to have an attractive portfolio of development and exploration assets in Brazil, Australia and Peru and its balance sheet enables it to pursue organic growth and acquisitions. Its current investment in existing discoveries exploit high value synergies with other production assets and exploration upside in the Santos Basin in Brazil. Exploration proves to be a core value-creation process with a significant success rate. Its Echidna development is focused on a capital efficient, risk weighted concept that is economically robust. The Group looks for high equity interests in early stage exploration opportunities containing large potential targets in basins with proven Petroleum Systems. The Group strives to create shareholder value through the geotechnical work-up of the acreage through leveraging its high equity interests to explore and appraise these opportunities to achieve commercialisation. Lately, KAR downgraded Echidna and Kangaroo 2C resources post seismic reprocessing. Primarily, shallow oil-water contact (OWC) and additional faulting in the reservoir led to the downgrade. However, the 1C (90%) resource was up 2% which still depicts better view and certainty on the higher probability resource. While this can impact the valuation and is associated with US$18-25/bbl operating costs and US$6-10/bbl capital expenditure costs, the group’s capability in terms of acquiring production in the offshore Brazil region stays intact. Then, group’s net prospective resources for Block Z-38 in Peru, with the Marina Prospect, is an advanced drilling target with 102mmbbls of oil. With these assets and capabilities, we expect KAR to regain its lost momentum. The recent approval from Brazil’s oil and gas watchdog, ANP on Karoon’s declaration of commerciality for its Kangaroo and Echidna discoveries is looked to be another positive. The group’s return on equity has also moved up from -9.1% as at June 2017 to -3.8% as at December 2017.


Overview of Karoon Projects (Source: Company Reports)

Received an approval from the ANP - Karoon received an approval from the ANP for the Neon (Echidna) and Goia (Kangaroo) Declaration of Commerciality. Karoon has received ANP approval of the Final Discovery Evaluation Report (RFAD) in relation to the Kangaroo and Echidna discoveries under Santos Basin Brazil for wholly owned Santos Blocks S-M-1037, S-M-1101, S-M-1102, S-M-1165 and S-M-1166 along with a Declaration of Commerciality (DoC). The Company submitted the RFAD and DoC documents in early May to the Brazilian oil and gas regulator, Agência Nacional do Petróleo, Gás Natural e Biocombustíveis (ANP). These documents outline the two distinct areas that were identified for retention which included the Echidna and Kangaroo oil accumulations along with some near-field prospective resource opportunities.


Oil Discovery at Echidna and Kangaroo (Source: Company Reports)

The RFAD and DoC approval from the ANP mark the end of the Exploratory Phase and indicate for the commencement of the Development and Production Phase. Though the approval marks the start of the Development and Production Phase, but it does not constitute a final investment decision (‘FID’) and this FID will be assessed independently of these approvals by KAR and Group will be in a position to decide on FID later in 2018. As is the convention in Brazil, on Declaration of Commerciality, field names are given to those parts of a field that are in different blocks and are named after marine organisms and as each field straddles two blocks, Kangaroo will officially become GOIÁ and GOIÁ SUL and Echidna will become NEON and NEON SUL.

Change in the Resource Estimates - The Group revised its estimates in May 2018, of Contingent Resources in its Brazil Echidna and Kangaroo oil fields and Prospective Resources in Peru block Z-38 and Australian block WA-482-P due to new data analysis and interpretation. Prospective Resource estimates in Peru block Z-38 have been updated. Gross (100%) ‘Best’ case Prospective Resources are estimated at over 1.3 billion barrels on an un-risked basis and these estimates are lower than previously reported estimates and also have a lower geological risk and were critical in securing Tullow as a farm-in partner in February 2018 ahead of drilling in 2019.


Prospective Resource Estimate for Peru Block Z-38 (Source: Company Reports)

Revised estimates in Australian permit WA-482-P after interpretation of new 3D seismic data have resulted in Gross (100%) ‘Best’ case Prospective Resources of 2.8 billion barrels of oil. The updated interpretation recognizes a potential for additional faulting within the field area. This is predominantly reflected in a reduction of GRV at the P90 level at Echidna Contingent Resource. The revision in prospective resource numbers resulted from the completion of detailed geological interpretation of regional wells and fields and seismic interpretation and geophysical analysis using the latest industry techniques. Thus, the group downgraded Echidna and Kangaroo 2C resources by over 30% based on seismic reprocessing while 1C resource was upgraded 2%. Karoon holds a 100% interest in, and is an operator of S-M-1037, S-M-1101, S-M-1102, S-M-1165 and SM-1166 Blocks, of Santos Basin.



Prospective Resource Estimate for Australian permit WA-482-P (Source: Company Reports)

Some Key Updates - Karoon continued its evaluation of production and development acquisition opportunities, along with new strategic exploration acreage opportunities; and the majority of its production and development acquisition strategy is focused on offshore opportunities in Brazil where the Group has an operational presence. During the March Quarter, the Group signed a farm-out agreement with Tullow for a 35 per cent equity interest in offshore exploration Block Z-38, Tumbes Basin Peru. Tullow has agreed to fund 43.75 per cent of the gross cost of the first exploration well and will be paying US$2 million upon completion and a further US$7 million will be payable upon declaration of commercial discovery and submission of a development plan to Perupetro SA, the Peruvian oil and gas regulator. A number of opportunities are under its way due to the Petrobras asset divestment program, along with divestments from other non-Petrobras companies and recently Petrobras announced the relaunch of the Baúna oil field sales process and due to its proximity with Karoon, it would provide the possibility for material operational synergies. As on 31 March 2018, the Group reported $329 million of cash balance and all are in US Dollars. The cash was later reported as $333 million with no debts.


Estimated cash outflows for next quarter (Source: Company Reports)

Outlook - The Group has upcoming development projects at Echidna-Kangaroo in Brazil and another upcoming drilling in Peru with its new partner, Tullow Oil. Moreover, it has high impact exploration projects in the southern Santos Basin in Brazil. Karoon’s strategic vision is to transform into a global Exploration & Production (E&P) company with material production underpinning a highly prospective exploration portfolio. The Echidna oil discovery is in FEED stage and tenders are now being assessed for a potential hub development in the future, taking advantage of the current industry equipment surplus as oil prices continue to strengthen. Its production test at Echidna-1 and Kangaroo-2 have proven reservoir deliverability at decent levels. Karoon is also expecting bids for an OPEX focused solution to reduce upfront CAPEX of development with regards to its Echidna and Kangaroo oil fields. After successfully completing the farm-out to Tullow Oil (subject to Government approval), Karoon has now completed a revised internal report on its Prospective Resources for the company’s Z-38 block in the Tumbes Basin of Peru.

Stock Performance - The Group continuously focuses on acquiring a first-class production asset and its aim is to achieve a cost-effective solution with an expected target OPEX of approximately $18-$25 per barrel and expected capex of approximately $6-$10 per barrel. Advanced geophysical studies have identified new younger and shallower targets at Tumbes Basin in Peru and it is one of the hydrocarbon basins having large prospects well defined by 3D seismic; and there are plans to drill up to two exploration wells in 2019/2020. The Group has people and resources needed to achieve strategic goals with highly experienced commercial, engineering and geoscience team. Additional near-field prospects have been identified in close proximity to Echidna and Kangaroo (Emu Updip and Joey) and are in favourable locations and may provide targets for later drilling as potential low-cost resource additions. While the Company’s core strategy is to identify off-shore early stage exploration opportunities, Karoon’s longer-term strategy is to retain residual equity interests in the assets as they go into production. The stock plunged about 21% in the last one year and was down by 16.17 per cent in last six months. The stock fell by 5.11 per cent in last five days given the oil price scenario. By looking at the overall performance, long-term scenario and new strategies and initiatives undertaken, we give a “Buy” recommendation at the current market price of $1.100.
 

KAR Daily Chart (Source: Thomson Reuters)

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