Company Details - Karoon Gas Australia Ltd is an Australia-based oil and gas exploration company. The Company is engaged in the investment in hydrocarbon exploration and evaluation in Australia, Brazil and Peru. The Company operates in three segments: Australia, Brazil and Peru. The Company's Australia segment is involved in the exploration and evaluation of hydrocarbons in two offshore permit areas, such as WA-314-P and WA-482-P. Its Brazil segment is involved in the exploration and evaluation of hydrocarbons in six offshore Blocks, which include Block S-M-1037, Block S-M-1101, Block S-M-1102, Block S-M-1165, Block S-M-1166 and Block S-M-1352. Its Peru segment is involved in the exploration and evaluation of hydrocarbons in two blocks, including Block 144 (onshore) and Block Z-38 (offshore). Its Australian permits cover a combined area of approximately 15,500 square kilometers. Its subsidiaries include Karoon Energy International Pty Ltd, Karoon Gas Browse Basin Pty Ltd and Karoon Gas (FPSO) Pty Ltd.


KAR Details
 
Acquiring two offshore oil projects from Petrobras: Karoon Gas Australia Limited (ASX: KAR) has confirmed that the company is in negotiations for the final agreement with Petrobras and performing due diligence for acquiring two oil projects. One oil project, the Bauna project is the 100% operator interest in concession BM?S?40 that is currently producing over 45kbpd while the other oil project, the Tartaruga development project is the 50% non?operator interest in concession BM?C?3. Following a competitive bidding process which is being done from the past twelve months, the group would acquire the oil fields after the management conducts confirmatory due diligence, negotiate the final terms and conditions post getting relevant regulatory approvals. As a result of this deal, KAR’s stock rose by 24.16% in just last five days (as at October 11, 2016) as the group confirmed the details of the talks. But before this stock rise, KAR stock was placed in the Trading Halt Session while the stock restarted the normal trading on October 11, 2016.
 
Awarded exploration permit EPP46:KAR has been awarded the exploration permit EPP46, which covers 17,793 square kilometers of Australia's most active and prospective frontier oil exploration province, the Ceduna Sub Basin, in the Great Australian Bight (GAB), offshore South Australia. The GAB has one of the world's last underexplored Cretaceous basins, which comprises the Ceduna Sub Basin. The Ceduna Sub Basin contains a massive Cretaceous delta system promising a potential of being the world’s major hydrocarbon province having the world class potential. KAR has initially committed three years that requires the acquisition of 2D and 3D seismic surveys and does not include a well.  Moreover, the industry that includes BP, Statoil and Chevron, has committed about A$1 billion for drilling nine exploration wells in the surrounding permits during the next two years. Therefore, the geology, potential target size and surrounding significant near term exploration activity gives huge opportunity to KAR. Additionally, the drilling success in the surrounding permits is expected to be transformational to prospectively in KAR's Permit.
 

Exploration permit EPP46 (Source: Company Reports)
 
Acquisition of remaining 35% interest in Santos Basin exploration blocks:KAR has also entered into a binding Sale and Purchase Agreement for Pacific Exploration and Production Corp with 35% equity interest in the jointly held Santos Basin exploration blocks S-M-1037, S-M-1101, S-M-1102, S-M-1165 and S-M-1166 valued up to US $20.5 million. The agreement is done for insolvency protection with the Superior Court of Justice in Ontario, Canada during April 2016. As per the agreement, KAR would pay an upfront cash payment of US$15.5 million on completion of the acquisition. In addition, a deferred contingent payment of US $5 million is payable upon the first production reaching a minimum of 1 million barrels of oil equivalents from the blocks. The agreement will be reached after the Petroleum Regulator, the Agência Nacional do Petróleo, Gás Natural e Biocombustíveis gives an approval order from the Superior Court of Justice in Ontario. Additionally, the acquisition of Pacific's interest in the Blocks would enable KAR to introduce a new funding partner for the progress of the Echidna discovery appraisal drilling campaign. With this purchase, KAR now owns 100% of the Echidna and Kangaroo light oil discoveries.
 

Preferred Development Concept (Source: Company Reports)
 
KAR continued their efforts of acquisition opportunities despite volatile oil environment:Oil prices have been volatile this year and even reached lowest over a decade, before recovering. Despite these fluctuations, the group has made efforts to position itself in this environment and continued to pursuing potential opportunistic acquisition of producing assets while controlling drilling rig and development costs. The group had undertaken due diligence on a large number of its oil and gas assets spread across the world during fiscal year of 2016 which gives them a good standing to complete strong and value accretive acquisitions. Moreover, given the subdued oil prices environment, the industry has been cutting well costs which have reduced significantly. As a result, the costs of completed production wells have fallen over 35% or US$50 million while the costs of injection wells have fallen over 25% or US$25 million over the past year. The group’s solid cash position of $479.59 million as of June 2016 is positioning the group to withstand huge costs of the acquisition and exploration activities.
 
Softness in fiscal year of 2016 performance:KAR has reported a weak FY 16 performance and delivered a loss after tax income of $105,126,345 during the year as compared to the profit after tax expense was $231,456,873 in FY 15. This huge loss is mainly due to write-off of capitalized exploration and evaluation expenditure related with historical Australian exploration and evaluation activities that are no longer continuing. FY 16 also included the evaluation expenditure expense of $1,508,493 as compared to $934,112 in FY 15 from reviewing new exploration opportunities predominantly in Australia and Brazil, and $1,674,246 (against $nil in 2015) incurred for business development and other related activities. On the other hand, these efforts have paid off as KAR enhanced its net 2C contingent resource volume estimate for the Santos Basin blocks of 129 mmbbls across the Echidna (75 mmbbls) and Kangaroo (54 mmbbls) light oil discoveries. Echidna discovery pre-FEED studies in Brazil indicated a floating production, storage and off-loading facility (‘FPSO’) development concept during the period. 
 

Exploration efforts (Source: Company Reports)
 
Plan for CY 17:KAR will focus in the calendar year 2017 on furthering the appraisal and pre-FEED work on both Echidna and Kangaroo. KAR aims to commence drilling during calendar year 2017, and to continue development planning to achieve first oil by 2020. Moreover, KAR has an impressive portfolio of projects ranging from appraisal and pre-development in Brazil, to drill-ready exploration projects in Peru and to geotechnical work-up in Australia. The group’s geotechnical evaluation of Karoon’s acreage in Peru and Australia showed positive outcomes during fiscal year of 2016. Management believes that their enhanced geological position especially at Block Z-38 would enhance the prospective in the block. The group is making discussions with rig owners to prepare for a drilling campaign.
 

Appraisal drilling and acquisitions (Source: Company Reports)
 
Stock Performance: The shares of KAR have fell over 10.5% in this year to date (as of October 11, 2016) impacted by falling oil prices coupled with weak financial performance in 2016 due to rising development costs. Moreover, the stock has been removed from S&P/ASX all Australian 200 index effective September 16, 2016. On the other hand, the group has built a track record of drilling success and has a 62% exploration drilling success rate. Moreover, after huge volatility in the oil prices, the prices started recovering in the recent past after Saudi Arabia supported a production cut and recently Vladimir Putin, Russian President also expressed their support to join the oil production cuts. This recovery in the oil prices could also further drive the group’s shareholder value. KAR is also strengthening its management team and has appointed Ms Luciana Rachid to the Board after FY 16 end, who comes with more than 30 years’ of experience in the Brazilian oil and gas industry, and will leverage the expertise for KAR’s future operations. The group implemented their right to 10% on-market share buy-back, indicating the management’s confident of stock recovery. We recommend investors to leverage the attractive price levels in the stock and give a “Buy” recommendation ahead of their final deal to acquire Petrobras’s two oil projects, at the current price of $1.79

 
KAR Daily Chart (Source: Thomson Reuters)

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