Karoon Energy

KAR Details

Notice of Substantial Shareholder: Karoon Energy Limited (ASX: KAR) is engaged in the exploration and production of oil with projects in Australia, Peru, and Brazil. On 17 August 2021, Yarra Management Nominees Pty Limited, TA Universal Investment Holdings Limited, Yarra Capital Management Limited, Nikko Asset Management Australia Limited, and Nikko AM Equities Australia Pty Limited together increased their shareholdings from 6.0842% to 7.487% in KAR.

Leadership Change: On 16 August 2021, KAR declared the appointment of Mr Ray Church as the CEO and Executive Vice President of the company.

Q4FY21 Highlights:

• Increase in Oil Production: KAR reported an increase in the oil production from its Bauna field in Brazil to 1.19 million barrels (mmbbl) in Q4FY21, up by 4% QoQ.
• Higher Realised Net-Prices: The company realised US$65.31/bbl of average net price in Q4FY21 versus US$55.42/bbl in Q3FY21.
• Oil Revenue: KAR posted US$95.7 million of revenue for Q4FY21, taking the FY21 revenue to US$170.8 million.
• Cash Receipts: KAR generated US$61.9 million cash receipts in Q4FY21, taking the FY21 receipts to US$137.0 million.
• FID on Patola Project: In Q4FY21, KAR undertook an FID (Final Investment Decision) to develop the Patola field.
• Currency Change: KAR changed its presentation currency to USD from AUD in Q4FY21.   
• Liquidity Position: KAR holds US$133.2 million cash and cash equivalents as of 30 June 2021 and reported no external loans.

Oil Production from Q3FY21-Q4FY21; (Analysis by Kalkine Group)

Key Risks:

• Oil Price Changes: KAR faces fluctuations in the realised oil prices, which can impact its financial performance.

• COVID-19 Uncertainties: The pandemic can cause project delays, change in the protocols for mining may disrupt business operations.

Outlook:

• KAR will release its FY21 results on 23 September 2021 and expects 3.14mmbbl of oil production in FY21.
• KAR is conducting a strategic review for the next five years to refresh its strategy and goals and expects to complete it in the September 2021 quarter.
• The oil sales guidance stands at 2.90 mmbbl, with the unit operating cost guidance revised to US$24–26/bbl from US$23–27/bbl for FY21.
• The other operating costs are re-estimated to be US$12 -14/bbl from US$14-16/bbl.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of KAR gave a positive return of ~22.51% in the past nine months and a positive return of ~41.81% in the past year. The stock is currently trading above its 52-weeks’ average price level band of $0.685 - $1.490. The stock has been valued using an Enterprise Value to Sales based illustrative relative valuation method and have arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight premium than its peers’ mean, considering its higher Q4FY21 production, expected increase in the oil production from Patola and Bauna fields, and no external debt in Q4FY21. For the purpose of valuation, few peers like Cooper Energy Limited (ASX: COE), Central Petroleum Limited (ASX: CTP), Santos Limited (ASX: STO), have been considered. Considering the current trading levels, increase in Q4FY21 production, ongoing development of Patola and Bauna fields to boost production in CY23, revised lower guidance for other operating costs, valuation, and key risks associated with the business, we give a ‘Speculative Buy’ rating on the stock at the current market price of $1.170, up by ~1.739%, as on 24 August 2021.

KAR Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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