Pure oil play, Karoon Energy, keeps knocking out the numbers that the market wants to hear. In a risky industry, where things do go wrong occasionally, this company is steadily accumulating an impressive body of work.
The Bauna intervention campaign has been a big success. The three interventions drilled increased production rates by more than 11kbopd, comfortably above the targeted 5-10kbopd. Total production peaked at 25kbopd in October and has stabilised around 24kbopd before natural decline recommenced. KAR therefore deferred the fourth intervention well and moved the Maersk Developer rig to the Patola field where the first of two wells has already revealed reservoir thickness and quality slightly better than expected. The second Patola well will commence in early November. First production from Patola remains on target for the first quarter of CY23.
Royalty boost. The Brazilian Government has reduced the royalty payment applying to incremental production from the Bauna and Patola fields that resulted from the intervention drilling. The historical 10% royalty continues to apply to the original production base. For incremental production (up to 50% of the base), a royalty charge of 7.5% will apply and this will reduce to 5% for production above 50% of the base.
Operating cash flow of US$96.5 million was reported after oil sales revenue of US$155.3 million was achieved. Capex of US$62.1 million left KAR with free cash flow of US$34.3 million for the quarter. KAR had drawn debt of US$30 million with US$180 million undrawn and available.
Investment View
KAR has a number of positive catalysts that support a higher share price and our Buy recommendation. Production guidance for FY23f was lifted at the lower end and is now 7.5-9.0 mmboe. With first production from Patola due in this financial year, it may influence the final outcome on production. Next, the company will present its Reserves and Resources update in early 2023 after re-analysing its 3D seismic survey data. At 30 June 2022, reserves were 44.8 mmbbls and the natural decline rates have been reduced from 15% to ~10%. Following that will be the flow of news on the Patola field and then the excitement ramps up as the nearby Neon field gets explored.
KAR management has done an excellent job to date. The balance sheet is flush with cash, operational efficiency is high (unit cost of production falling from US$25/bbl towards US$15-20/bbl guidance), and there is genuine exploration potential.
Risks To Investment View
Oil prices are volatile and KAR’s production could be interrupted by operational issues. Both would impact earnings.
Recommendation
We have retained our Buy recommendation.
Figure 1: Revenue and average realised price
