Basket hunting

RESULTS ANALYSIS

Need To Know

• Neon a logical next asset to develop.
• Balance sheet in a strong position to consider an acquisition.
• Highly capable management has earned the right to expand, in our view.

Investment Implications

FY23 results overview (vs consensus):

Underlying net profit US$146m in-line

Underlying EBITDA US$322m in-line

FY23 earnings matched market expectations in a year when KAR’s output surged, and prices fell just 6%. With Baunia and Patola now firmly entrenched in production mode, the company is sizing up the Neon discovery and its adjacent buddies as the next step in the portfolio.

FY23 production hit 7.0 mmboe with unit costs falling 38% to US$15.75/bbl (on a pre AASB16 basis, industry standard). Capex has already peaked at US$238m and, before any decision on Neon, will dawdle along in FY24 around US$19-24m. The temporary Brazilian tax on oil exports cost the company US$14.6m but has now ended.

Cash flow from operations zoomed to US$306m as the production lifted which helped KAR to fund the highly successful Bauna intervention campaign and the development of Patola. Average daily production rates have been excellent and are settling around 33-34kbopd. Natural field decline rate around 15% will keep management busy ensuring optimal field management is in place. To that end, KAR installed two US$10m pumps that will be carefully managed given they were very tricky to install.

During FY23, KAR drilled two wells at Neon which gave the company sufficient confidence that a decision on concept selection is likely to follow. The wells were drilled for US$45m or about one-third of the expected cost. The nearby (2km) Neon West field is beginning to look highly prospective adding to the appeal of Neon as KAR’s next big project. KAR’s CEO Julian Fowles said the company was likely to find a partner to help develop Neon (KAR 100%) and first production could be five years away.

That brought the discussion to KAR’s acquisition intentions. The company has been considering several options including projects in the Gulf of Mexico but have been cautious on finding the right target. KAR is ambivalent about being the operator if a GoM acquisition is made but would prefer operator status if in Brazil.

Investment View

Aside from a 6-week unplanned outage, Karoon Energy has banked another very successful year as Australia’s only pure-play oil stock.

KAR has very strong credentials – a producer of >30k bopd, US$75m cash on balance sheet, a largely fixed cost base, a viable new project at Neon and 52mboe of 2P reserves (2C contingent resources 98mboe).

KAR has the capacity to make an acquisition and is keen to diversify from its perceived ‘one egg in one basket’ portfolio.

Capital management is not out of the question either. The Board shied away from a dividend after being spooked by the unplanned outage of the FPSO in FY23. But it is keen to see shareholders participate in the hard work and excellent achievements in Brazil so far.

There can be no doubt that KAR has earned the right to take the next step to build the company beyond the Santos Basin in Brazil. Even if it asks shareholders to assist, that would be a risk worth taking, in our view.

We have retained our Buy recommendation.