Two important positive announcements from Karoon Energy this week should overshadow the distraction of the temporary Brazilian export tax.
Neon. The third exploratory well in the Neon field has delivered excellent news with a 105m oil pay. The quality of Neon-2 was similar to the two prior wells drilled in Neon so KAR will now spend time analysing the data to determine the updated resource. The previous May 2018 estimate indicated 1C resource of 30 MMbbls (2C 55 MMbbls).
Patola. KAR announced the first production has begun at Patola which is expected to stabilise at 10-15k bopd taking the total production at Bauna/Patola to more than 30k bopd. The intervention campaign undertaken by KAR has proven to be very successful leading to this doubling of production. It is worth mentioning that the execution of this development has been almost flawless in an industry where things can and often do go wrong.
Investment View
The US$65-75m spent on Neon so far has clearly been worth it for the potential of a standalone commercial development. The bonus could be that this will re-risk the nearby 27mmbbls of 2C resource at Goia.
KAR’s most recent 2P reserve assessment in January 2023 added 10.2mmbbls to the 30 June 2022 2P reserve total of 44.8mmbbls. Neon will add to that figure in due course.
The temporary Brazilian oil export taxis expected to have a US$22-35m pre-tax profit impact for the 4 months it is being imposed (1 March to 30 June 2023). KAR is likely to produce 2.9-4.6mmbbls during that period. Investors will understandably fret that this tax may become permanent but there is currently no indication this will happen.
Even with the export tax, KAR is potentially heading towards a free cash flow yield in excess of 40% in FY24f. Most of that will accrue to equity holders given KAR is materially net cash.
The share price slide this week is no reflection on KAR’s business and presents an opportunity to buy Australia’s only pure play oil company.
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.
