Karoon Energy’s exposure to high oil prices with rising production and increasing developed reserves is a dynamic that justifies a Buy recommendation.
KAR’s 4Q22 production was 1.08MMbbls which nudged the full year production just above guidance to 4.64MMbbls. The average net realised oil price received in the quarter was US$107.43/bbl, a 13%
increase on the March quarter.
FY22 oil revenue reached US$385.1 million with an average net realised price of US$84.84/bbl.
The four well Bauna intervention campaign commenced during the quarter. The schedule is slightly behind target and higher diesel prices are pushing the program costs towards the upper end of the US$110-130 million guidance. Planning for the two development wells at Patola is on schedule and two control wells are scheduled for the Neon development.
Investment View
KAR is not everyone’s cup of tea. Its main assets are located offshore Brazil, it has a relatively short reserve life, and it owes the state oil company, Petrobras, around US$200-240 million, depending on the oil price – this was part of the Bauna acquisition. On the other hand, it has US$185 million cash, is heading towards
daily production of 30kobpd by early 2023, has little hedging in an elevated oil market, and at the current spot price would be generating 100% of its market cap in the next two years in free cashflow. At that level, KAR could repay Petrobras in full and still have approximately 25MMbbls of 2P reserves that are not accounted for by the market cap today. Essentially, that is free oil.
There is further development work underway at Neon and while KAR rejected a recent potential acquisition (Atlanta), it has the balance sheet capacity to consider others. KAR’s production profile is heading towards 8-10mmboe in FY23f with unit production costs going the other way towards US$24- 26/bbl.
The recent share price fall logically had little to do with the company’s performance and presents an opportunity to grab a slice of the increasingly attractive profile. More detail on the outlook is expected from the 25 August FY22 result announcement.
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.
