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) is into the exploration of natural gas and hydrocarbons in Australia, Brazil and Peru; and its exploration activities focus on Browse Basin (Western Australia), Bonaparte Basin (Northern Territory), Tumbes Basin (Peru), Maranon Basin (Peru) and the Santos Basin (Brazil). The Company’s core strategy is to identify off-shore early stage exploration opportunities, but the company’s longer-term strategy is to retain residual equity interests in the assets as they go into production. KAR’s FY18 result was not so good with net loss of $182m being reported at the back of a $151m non-cash impairment of Kangaroo (Goiá) with a resource downgrade earlier this year; however, the net cash position at $334m provides a stable base for potential partnership or M&A opportunities in FY19. It also stays committed to farming out a portion of 100% working interest before development for the Neon asset. While Earnings per share is expected to slightly improve in FY19, the scenario over FY20/21 may witness minor slip owing to rolling forward of costs, however, potential opportunities from Neon can balance it out. There is an expectation of a single digit rise in stock price with support from the latest developments while oil price has been on a fluctuating mode.

Commencement of the Development and Production Phase of Neon (Echidna) and Goiá (Kangaroo): Karoon continues to work with the Agência Nacional do Petróleo, Gás Natural e Biocombustíveis (‘ANP’), which is the Brazilian oil and gas regulator and service providers after the approval of the Declaration of Commerciality (‘DoC’) for the Neon (Echidna) and Goiá (Kangaroo) light oil discoveries by the ANP. This DoC approval marked the end of the Exploratory Phase and commencement of the Development and Production Phase for both of these assets. The development will be in a sequential manner with first phase of the development strategy for Neon and the second phase of development of Goiá. Neon is designed to comprise of two producers and one gas injector in the primary plan. These wells will be produced through a Floating Production Storage and Offloading unit (‘FPSO’). Karoon currently has multiple proposals for FPSO’s and the first production is expected to occur in the early 2020’s. The development strategy of Goiá, which is a part of second phased development strategy would be mostly dependent on a successful development of Neon and the future associated economic evaluation. KAR has already reassessed the discovery’s standalone economics of Neon. KAR has reassessed the Goiá’s 2C (best estimate) contingent resources to 27 mmbbls. Based on these factors, Karoon projects that its full year results will provide for a non-cash impairment charge of $140 million for exploration Blocks S-M-1101 and S-M-1165, which includes the Goiá discovery. KAR will continue to assess the appropriateness of the carrying value of Goiá, and depending upon future oil prices, resource updates and development strategies, the value of the asset might increase and hence part or all of this impairment charge could be reversed at a future date. However, this impairment will not impact KAR’s contingent resource estimates for Goiá. Moreover, as part of the development plans for Neon and Goiá, the company is obtaining bids for drilling and completion services, sub-surface infrastructure and FPSO leasing. KAR has already received interest from tenderers, and is now working with several providers, for the preparation of the development plans for submission to the ANP. The development plans will follow an overall strategic development timeline, and therefore applications will be submitted separately. For Neon, it is expected to be submitted before the end of 2018 and Goiá expected to be submitted after it in a sequential manner.


Neon (Echidna) and Goia (Kangaroo) (Source: Company Reports)

Positive impact from Removal of Force Majeure, Block Z-38, Peru: Due to the recent changes to the hydrocarbon law in Peru, KAR is positively impacted and the changes resulted in force majeure being lifted from Block Z-38. Karoon has been actively working with the Peruvian authorities with this outcome in mind, and considers these changes as a step forward for exploration in Peru. After getting the regulatory approval, Karoon and its new farm-in partner Tullow Oil Peru Limited (‘Tullow’), are working together and going forward to drill the Marina-1 exploration well during early 2020. The well will test the Marina Prospect that comprises of a best case gross prospective contingent resource of 256 mmbbls at 100% interest (102 mmbbls net to Karoon). This will be the first well drilled in Block Z-38. The block is located in the heart of the Tumbes Basin, which is adjacent to the prolific oil producing Talara Basin that has produced 1.7 billion bbls to date. The Tumbes Basin has a proven working petroleum system and evidence suggests the prospects in Block Z-38 are accessing the same source rocks as the giant onshore Talara Basin fields. Moreover, Tullow has a proven long established track record for exploration and both KAR and Tullow recognise the high impact of the Marina-1 exploration well in opening up offshore exploration in the Tumbes Basin. There is a best case gross un-risked prospective resource of 1,373 mmbbls at 100% (549 mmbbls net to Karoon) in 20 leads and prospects in the block. The key to the revision in the resource estimates in these leads and prospects were the addition of the shallower La Cruz Formation and Mal Pelo Formation prospects. Many of these are now identified with clear seismic anomalies.

Update on WA-314-P, Browse Basin and EPP46, Ceduna Sub-basin: KAR has completed the reprocessing of the seismic data in the WA-314-P permit and Karoon now is in discussions with the regulator regarding a forward work program for the permit. KAR is hopeful that it can acquire the 2D/3D seismic data required for permit EPP46 Ceduna Sub-basin, Great Australian Bight. It is positive that data will be available for the permit in the coming year.

Performance for FY18: For FY18, KAR has delivered loss after tax income of $181,777,789 compared to $81,527,513 in FY17. KAR as at 30 June 2018 has cash balance of $333.6 million. KAR currently holds almost all its cash in United States dollars. During the FY18, total assets decreased from $806,569,836 to $594,920,565, total liabilities decreased from $47,677,671 to $39,694,851 and total equity decreased to $555,225,714.


Financial Performance (Source: Company Reports and Thomson Reuters)

Performance during June 2018 Quarter: During the June 2018 quarter, Petróbras had relaunched the Baúna oil field sales process. This asset remains an opportunity of interest for KAR and due to the proximity to KAR’s existing acreage position if acquired would provide the possibility for significant operational synergies. The company continues to evaluate the production and development acquisition opportunities, along with new strategic exploration acreage opportunities. KAR’s production and development acquisition strategy is focused on (but not limited to) offshore opportunities in Brazil where the company has an operational presence. There are currently a number of acquisition opportunities due to the Petróbras asset divestment program, along with divestments from other non-Petróbras companies. Further, KAR is in advanced discussions with oil and gas companies relating to jointly evaluate the opportunities in the southern Santos Basin. Meanwhile, during the June quarter the joint bidding agreement with DEA Deutsche Erdoel AG ended.

Resources Update: KAR has revised its estimates 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. The updated Contingent Resource estimates for Echidna and Kangaroo comprises of reprocessed seismic interpretation and core lab data analysis. The company has updated Prospective Resource estimates in Peru block Z-38. Gross (100%) ‘Best’ case Prospective Resources are estimated at over 1.3 billion barrels on an un-risked basis. The revised estimate is lower than previously reported estimates, but have lower geological risk and were critical to securing Tullow as a farm-in partner in February 2018 ahead of drilling in 2019. The 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.

Appointment of Key Personnel: KAR has appointed Mr Peter Turnbull as the Interim Chairman of the company from 15 August 2018. This decision has been taken after the unfortunate passing of Dr. David Klingner. The company will be conducting a thorough process to appoint a permanent replacement. After the appointment of Mr Turnbull, KAR’s Board will comprise of a total of seven Directors including four independent Non-Executive Directors (including the Interim Chairman), one Non-Executive Director and two Executive Directors.


Strengths and Risks (Source: Company Reports)

Stock Recommendation: Meanwhile, KAR stock has risen 3.23% in three months as on October 23, 2018 and the stock has support at $1.00 and resistance around $1.28. FY 18 was a positive year for global oil & gas industry as the oil prices reached three years high due to excess supply being reduced by rising global demand. Karoon has presence in Brazil, which is well positioned within the improving global environment as Brazil actively and aggressively seeks to attract investment in the oil and gas sector. Brazil is expected to become the largest FPSO market in the world. Moreover, the 2C contingent resource estimates for light oil discoveries in the Santos Basin, Brazil are currently 55mmbl (Echidna) and 27 mmbl (Kangaroo), which are potentially targeting peak production of 25k to 28k bopd. Approximately 20 global oil and gas projects were sanctioned for development during the first half of calendar year 2018, in which about 50% of these projects are expected to produce less than 50k boe per day per project. As the scenario for KAR looks opportunistic, we give a “Buy” recommendation on the stock at the current price of $ 1.075, down 4% at the back of oil price volatility on October 24, 2018.
 

KAR Daily Chart (Source: Thomson Reuters)
 
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