Karoon Energy’s 1H22 result was quietly confident with lower unit production costs than guided and higher average realised oil prices both contributing to an excellent outcome of US$89.5 million EBITDA.
Oil production from the Bauna field of 2.5mmbbl sets the stage for FY22f production guidance of 4.4-4.6mmbbl. Indicative production guidance for FY23f is 8-10mmbbl with unit production costs tumbling to US$12-18/bbl as about 90% of operating costs are fixed.
The unit production cost story keeps getting better as the 1H22 unit production cost of US$23.50/bbl enabling the FY22f guidance range of US$28-32/bbl to be lowered to US$28-30/bbl. In addition, KAR is smashing the facilities uptime dial at 99% - a great sign of tight operational control.
Rising oil prices are a key feature for KAR as it is a pure oil play. The average realised oil price received in 1H22 was US$72.43/bbl. This was 23% higher than the FY21 average price realised of US$59.00/bbl.
Operating cashflow for 1H22 was US$83.9 million and total liquidity position is a healthy US$334 million including US$130 million of undrawn debt and US$200 million cash. That will be more than enough to fund the estimated cost of the Bauna intervention campaign and Patola development (US$100-135 million capex in FY22).
Investment view
KAR is a pure play, short cycle oil producer so when oil prices are rising, thanks to Mr Putin, KAR is the type of company investors should own.
Of course, it is a single asset, Brazilian offshore producer and that entails more than enough risk for some, but we think KAR is nearing the point when it might consider an acquisition back in Australia. The diversification factor makes sense and KAR already has interests in the Carnarvon Basin.
There are other acquisition targets in Brazil that might be attracting CEO Dr Julian Fowles’ interest. There is a relatively small pool of competitors, and some are keen sellers.
KAR has hedged a small amount of production at US$87.50/bbl, but the bulk of the production is ready to be exposed to 100-dollar oil for however long geopolitical tensions in eastern Europe (western Russia?) and a lack of global oil supply is tolerated.
If investors don’t like paying A$2.00/litre for petrol, why not ease the squeeze by buying some of KAR’s theoretical US$100/bbl production?
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.
