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

Completion of Echidna reservoir modelling and production scenario analysis: During June quarter, Karoon Gas Australia Limited (ASX: KAR) crossed a noteworthy operational milestone as the subsurface evaluation and development optimisation work has been completed at Echidna to progress into Front-End Engineering and Design (FEED). In turn, in July 2017, the Board approved the current Echidna development concept to progress to the next phase. FEED is expected to take approximately 9 months and cost less than $10 million, with completion planned during the March 2018 quarter. Accordingly, a final investment decision (FID) is targeted for the June 2018 quarter. During FEED, KAR will issue a Request for Tender to select suppliers with the intention of contracting an Engineering Procurement Construction and Installation work package for the Echidna development. The Echidna development concept consists of a leased floating production, storage, and offloading facility; 2 extended horizontal production wells and 1 gas injection well with expected peak production approximately 28,000 bbl/day (14,000 bbl/day per production well). The dramatic oil industry pull-back over the past 3 years has led to lower vessel utilisation rates and higher equipment inventory levels, globally and in Brazil. However, this cyclical downturn has presented a window of opportunity in which it expects to receive tenders that provide significant funding flexibility. Importantly, based on recent supplier discussions, KAR expects to receive tenders that substantially reduce upfront capital commitments including deferred payment structures, equipment financing solutions and subsurface risk reward sharing and/or equity ownership. During the quarter, cash flows from operating activities stood at $12.3 million, while these were $70.7 million on year to date basis. The company had reported for a cash balance of $375 million as at 30 June 2017.


Echidna Appraisal Well Locations; (Source: Company reports)

Acquisition of 2D and 3D marine seismic surveys at Ceduna Sub-basin in Australia: Karoon’s initial 3-year firm commitment term consists of the acquisition of 2D and 3D marine seismic surveys and geological and geophysical studies. KAR is planning to acquire 2D marine seismic data via a multi-client 2D seismic survey over the permit during the first half of calendar year 2018. In turn, tenders have been received and are currently being evaluated. On the other hand, in nearby GAB permits, Chevron has a commitment to drill 4 exploration wells before November 2018 in the 2 blocks immediately to the west KAR’s exploration permit EPP46. In permit EPP39, Statoil has a 1 well exploration drilling commitment due to be completed before November 2019.


Ceduna Basin - EPP46, Australia; (Source: Company reports)

Completion of charge modelling studies at Carnarvon Basin: During the quarter, charge modelling studies over the permit were completed at Carnarvon Basin, Permit WA-482-P (50% Equity Interest). The studies were intended to better understand the risks associated with effective hydrocarbon charge for the mapped structures. The charge modelling results, along with the ongoing analysis of the extensive high quality seismic dataset across over 75% of the permit and the Levitt-1 well results were integrated into the geological model. Subsequently, this work will underpin a further risk analysis and ranking of the prospects in the permit. However, further geological and geophysical studies are required to better understand these prospects prior to any further consideration of exploration drilling.


Carnarvon Basin, Australia; (Source: Company reports)

Progress at Browse Basin and Tumbes Basin:  At Browse Basin, reprocessing of the Kraken 3D marine PSDM seismic data is ongoing and, the final reprocessed data is expected to be received soon, with interpretation work to follow. Further interpretation work, along with support of AVO/ Quantitative Inversion analysis, will allow re-risking of the Elvie prospect. At Tumbes Basin, Block Z-38, the drilling preparations were ongoing, while the Marina-1 exploration well location was reviewed to incorporate the additional younger reservoir targets identified in the seismic attribute analysis in the well plan.


Tumbes Basin, Peru; (Source: Company reports)

Evaluating exploration and appraisal opportunities: Karoon is continuously evaluating several potential production and development acquisition opportunities along with new exploration and appraisal opportunities that provide strategic synergies. With regards to the Baúna and Tartaruga Verde oil projects that were included in the Petróbras asset divestment program, Karoon was advised at the time that the previous sales process was withdrawn. However, Karoon remains committed to participating in any future process relating to these assets as Petróbras intends to reinitiate the sales process relating to these assets. Further, reinitiating a sales process under Petrobras’ revised methodology is expected to reduce the risk of any future court action against a potential sale and provide greater certainty for the successful bidder.

New acreage opportunities in Brazil: Recently, the Brazilian oil and gas regulator Agência Nacional do Petróleo, Gás Natural e Biocombustíveis (ANP) announced new acreage opportunities in Brazil with the launch of Bid Round 14, and the 2nd and 3rd PSC Bid Rounds. Further, key regulatory changes have been implemented to boost the attractiveness of these bid rounds, which include lowering and improving minimum local content requirements and ending Petróbras’ mandatory operatorship of pre-salt acreage. Notably, KAR has a competitive advantage in evaluating opportunities with a significant geological knowledge base and an operational track record in the Santos Basin. On the other hand, at the end of the quarter, KAR entered into agreements with DEA (Deutsche Erdoel AG) to review, evaluate and, jointly bid for oil and gas assets in selected areas offshore Brazil. DEA is a German based international oil and gas company with full lifecycle capabilities, which is owned by a well-capitalised investment company LetterOne Holdings S.A., based in Luxembourg. Moreover, DEA has outstanding operational capabilities with substantial production and earnings, along with ambitious growth strategy making them a good strategic fit for Karoon. As a part of the deal, an exclusive option has been granted to DEA for the acquisition of a non-operated equity interest of up to 50% in Karoon’s five Santos Basin offshore exploration blocks, including the Echidna and Kangaroo discoveries.


DEA capabilities; (Source: Company reports)
 
Long-awaited market rebalancing is under way as OPEC expects higher oil demand in 2018: The latest forecast by OPEC (Organization of the Petroleum Exporting Countries) of higher demand in 2018 and signs of a tighter global market, has indicated that the deal with non-member countries on slashing production is helping OPEC to mitigate the supply glut that has been weighing over the prices. OPEC now estimates that the world would need 32.83 million barrels per day (bpd) of OPEC crude next year (up 410,000 bpd from its previous forecast). Further, the fall in inventories and an increase in the price of Brent crude for immediate delivery to a premium over that for later supplies, known as backwardation, have signalled for a long-awaited market rebalancing. OPEC stated this to be due to the shooting up of demand for prompt-loading barrels and amid increasing sentiment that the oil market will rebalance over the next year with a major drawdown in crude and product stocks. Notably, this first stirring of backwardation since oil prices were above $100 a barrel is seen as a sign of tightening supplies and strong demand. OPEC plans to cap output by about 1.2 million bpd, while Russia and other non-OPEC producers are expected to cut half as much, until March 2018.


Stock performance and recommendation: The stock has fallen 28.3% in the last six months while it is down 16.3% in the past three months (as on September 12, 2017), owing to commodity price movements and court proceedings filed against Petrobras and Brazil’s national petroleum and natural gas, and biofuels agency (ANP). The court proceedings were related to Karoon Gas’ proposed acquisition of two major oil projects and contended that the sales process didn’t comply with Brazilian regulatory requirements. Considering this an interim injunction has ordered Petrobras and the ANP to cease the sale process. On the other hand, the group’s Echidna discovered oil resource appraisal promises a potential development opportunity to leverage the falling development costs and capitalise on current market conditions. Notably, KAR is aiming at peak production of approximately 28,000 bbl/day (14,000 bbl/day per production well). Further, strategic partnership with DEA expected to proffer opportunities offshore Brazilian oil and gas assets, can spark momentum. Farming out interests in Echidna can also be a step towards asset de-risking. Given the ongoing project developments and company’s initiatives to sustain in the low oil price environment, we give a “Buy” recommendation on the stock at the current market price of $1.19


KAR Daily chart; (Source: Thomson Reuters)

 
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