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 (Karoon) is an oil and gas exploration company; and since listing, Karoon has acquired a global portfolio of oil and gas exploration assets. It typically looks for high equity interests in early stage exploration opportunities containing large potential targets in basins with proven Petroleum Systems and strives to create shareholder value through the geotechnical work-up of the acreage, leveraging its high equity interests to explore and appraise these opportunities. The Company’s main strategy is to identify off-shore early stage exploration opportunities with a long-term strategy of retaining residual equity interests in the assets as they go into production. The Group has assets in Australia, Brazil and Peru with its major Brazilian asset currently preparing for appraisal and development. With this, Karoon is reaching production and witnessing a new phase in its history. The Group has few projects having high potential and some of them include Browse Basin, Santos Basin, Tumbes Basin, Carnarvon Basin and Ceduna Sub-Basin. The Group has highly experienced commercial, engineering and geoscience team. The Group has implemented cost-saving measures including reducing manpower, office overheads and managing exploration commitments to focus more resources on a production acquisition.


Geographic Diversification of the Company’s Projects (Source: Company Reports)

Update on March 2018 Activities- During the quarter, Karoon continued to advance towards its stated strategy of purchasing a quality oil and gas production asset. The Group recorded $329 million of cash balance as at 31 March 2018 and holds almost all its cash in United States dollars and later on it was reported as $333 million with no debts. It signed a farm-out agreement with Tullow Oil PLC (‘Tullow’) for a 35 per cent equity interest in Block Z-38, Tumbes Basin Peru.  Moreover, the Group submitted a Final Discovery Evaluation Report with a Declaration of Commerciality (‘DoC’) to the Brazilian oil and gas regulator, Agência Nacional do Petróleo, Gás Natural e Biocombustíveis (‘ANP’) relating to Santos Basin Brazil blocks S-M-1037, S-M-1101, S-M-1102, S-M-1165 and S-M-1166 and Echidna and Kangaroo light oil accumulations.


Estimated cash outflow for June Quarter (Source: Company Reports)

Other Key Updates - The Company received approval from the ANP for the Neon (Echidna) and Goia (Kangaroo) Declaration of Commerciality. 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) and these documents outlined two distinct areas that were identified for retention which included the Echidna and Kangaroo oil accumulations along with some near-field prospective resource opportunities.


Statistical aggregation of volumes (Source: Company Reports)

These approvals marked the end of the Exploratory Phase and the commencement of the Development and Production Phase and do not constitute a final investment decision (‘FID’). Further, Karoon will assess FID later independently and is expected to be in a position to decide on FID later in 2018. 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; and these 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. Meanwhile, Janus Henderson Group PLC became the substantial holder of the Group since 29 May 2018 and held 12,562,452 securities and 5.11 per cent of the voting power.


Santos Basin (Source: Company Reports)

Review of Operations - Some key updates from each project are highlighted below:

1. Santos Basin Blocks S-M-1037, S-M-1101, S-M-1102, S-M-1165 and S-M-1166- Karoon completed its assessment of the Echidna-1 well results and sub-surface dataset, along with preliminary market testing for development infrastructure and elected to progress from the pre-FEED phase of the Echidna light oil discovery

2. Santos Basin Block S-M-1537- The Group was awarded offshore Santos Basin exploration Block S-M-1537. A concession agreement was executed, and a non-refundable bid bonus and refundable work program guarantee bond were paid to the ANP.

3. Tumbes Basin Block Z-38-  Karoon successfully completed the farm-out of a 35 per cent equity interest to Tullow.

4. Northern Carnarvon Basin Permit WA-482-P- The Operator of an exploration permit WA-482-P received regulatory approval for a variation of the Year 6 work program which was replaced with a work program that is expected to cost less than $500,000 net to Karoon.

5. Browse Basin Permit WA-314-P- Following receipt of the final reprocessed Kraken 3D PSDM seismic data for exploration permit WA-314-P, interpretation has commenced which will allow a more accurate evaluation of the Elvie prospect.


Light Oil Discoveries at Echidna and Kangaroo (Source: Company Reports)

Positive Outlook- The Group continuously focuses on acquiring a first-class production asset and has a potential for upcoming development for Echidna-Kangaroo in Brazil. It has some upcoming drilling planned in Peru with its partner, Tullow Oil with high impact exploration site in the southern Santos Basin in Brazil and the progress work is streamed towards exploration drilling with Tullow. It plans to drill up to two exploration wells in 2019/2020 and most likely first well will be Marina-1 250 mmbbls best case. Partnership with Tullow, a very successful international explorer and developer represents a very significant deal for Karoon.


Tumbes Basin, Peru (Source: Company Reports)

The Group has up to US$200 million of deferred cash consideration from Poseidon gas discovery sale that remains outstanding, contingent on development. The Group’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 with tenders being assessed for a potential hub development in the future and is taking advantage of the current industry equipment surplus as oil prices continue to strengthen. It now aims to achieve a cost-effective solution with an expected target OPEX of approx. $18-$25 per barrel and expected capex of approx. $6-$10 per barrel.

Stock Performance - The Group’s position within the oil and gas industry is resilient and this ensures that Karoon will be able to consider opportunities to acquire exploration and production assets that will add value for shareholders and complement the existing portfolio. It operates in accordance with the high standards that are essential for sustainable long-term performance and value creation. The Company reviews sales processes where strategic opportunity exists (Bauna/Piracaba close to Echidna). It has been seen that exploration is Karoon’s proven core value-creation process with a success rate of 62 per cent. The Group has a potential to target peak production of approximately 25,000 to 28,000 bopd at Echidna. In fact, the Group has existing strategic partnerships and has positioned itself to take advantage of acquisition opportunities that support the Brazilian growth strategy.

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 may provide the possibility for material operational synergies. ROE improved from (9.1 per cent) in June 2017 to (3.8 per cent) in December 2017 and Current Ratio increased from 30.37 in June 2017 to 44.67 in December 2017. The stock fell by 16.8 per cent in last six months but saw some recovery of 3.32 per cent in last five days as on 3 July 2018. The stock is trading over its 52-week low price that is $1.02. We give a “Buy” recommendation at the current market price of $1.105 (up 1.37% on July 04, 2018) as the Group is continuously putting efforts on the evaluation of purchasing a potential production and development opportunity, along with new strategic exploration acreage opportunities.
 

KAR Daily Chart (Source: Thomson Reuters)

 
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