An uneventful quarter for Karoon Energy disguises the set of catalysts that make this pure oil play worth owning.
Including an 8 day planned maintenance shutdown and some natural decline, production of 1.05 MMbbls was less than the December 2021 quarter. Two oil cargoes were lifted in the period compared to three in 2Q22 with an average net realised oil price of US$95.20/bbl, up from US$75.44/bbl in 2Q22 and an average price of US$59.00/bbl in FY21. These cargoes generated revenue of US$94 million. The March cargo funds were not received until April.
KAR still has contingent payments to Petrobras to make of US$183.8 million pre-tax, but the current cash position of US$200.4 million covers that. The reserve life is also relatively short, for now, but there is exploration upside from the Neon field.
Importantly, the four-well Bauna field workover is about to begin with the arrival of the Maersk Developer drilling rig in Brazil. The rig will also drill two development wells in Patola. The KAR Board has now committed to drilling at least one control well in the Neon discovery and the Maersk rig will undertake that work while in the area.
The consequence of these developments will substantially increase KAR’s production from a guided range of 4.4-4.6MMboe in FY22f towards 8-10MMboe in FY23f. Unit costs will tumble towards US$12- 18/bbl.
At the end of March 2022, KAR announced it had entered a conditional offer to acquire a 50% interest in the Atlanta oil field, located in the northern Santos Basin offshore Brazil – the same Basin as Bauna, Patola and Neon. KAR has increased its total debt facilities to US$210 million, but with a big capex bill attached to Atlanta, the company might consider raising some equity if this deal goes ahead. Even so, the prospect of acquiring more than 50MMboe of net reserves and about 20k bopd net production from Atlanta, likely costing around US$5-10/boe, this could be highly accretive in the current macro environment.
Investment view
Almost all of KAR’s production is unhedged and exposed to elevated global oil prices. At spot levels, KAR would generate a free cash flow yield around 50% on FY24f numbers. There is acquisition upside based on a pristine balance sheet and an excellent management team.
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.
