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Karoon Energy (ASX: KAR)

3Q24 Trading Update Analysis – 22nd April 2024

Karoon Energy (ASX: KAR) released its March 2024 quarterly results to disappointment from the market. The biggest concern in the announcement was a production guidance downgrade, which followed recent volatility in the oil price and historically very low natural gas prices.

On a Net Revenue Interest (NRI) basis, quarterly production was 2.94 MMboe. This is an increase of 12.2% from the December 2023 quarter and 48.5% from March 2023.

Sales volume increased 7% from December, while revenue was 5.9% lower at US $196.6 million.

As we mentioned in our last update, Karoon has changed its financial reporting year-end from June to December.

Production

Production was boosted by the first full quarter of ownership of the recent Who Dat acquisition. NRI production for Who Dat increased from 0.09 to 0.78 Mmboe. However, the performance was still below expectations due to delays in bringing the new G2 and G4 wells online, production bottlenecks, and productivity issues.

The operator prioritised oil over gas production due to the recent slump in gas prices, which also affected productivity and the crude/gas production ratio. Despite the minor production woes, there was no production downtime.

The G2 well is now in production and drawing from the shallower of two reservoirs. Once pressure between the two zones is equalised, the well will start drawing from the upper and lower reservoirs at an increased total rate. This is expected to happen later in 2024.

Combined with the new G4 well, we expect strong production numbers from Who Dat in the latter half of 2024.

Bauna is the company’s biggest producing asset, 100% owned and operated. It was a difficult quarter for Bauna, with a gas dehydration operating issue impacting production. The SPS-88 well was shut down for the entire quarter, with intervention planning and contracting underway to bring the well back into production in 3Q24. Natural decline at Bauna also contributed to a lower flow rate.

March production numbers of 2.16 MMbbl was a 15% drop from the December quarter.

KAR is investigating options to extend Bauna past its 2028 end of life out to as far as 2038. The outcome of a decision to extend the life is contingent on the ability to secure longer operating leases.

The average realised price for oil out of Bauna fell 8.3% to US $76.13/bbl. Who Dat oil, condensate, and Natural Gas Liquids (NGLs) achieved an average price of US $77.55/bbl and a gas sales price of US $2.95/mcf. The operator’s decision to prioritise oil over gas led to a heavy weighting of January prices in the gas average price, with 40% of sales occurring in January before the gas price collapse.

Cash Position

The quarterly update doesn’t give a comprehensive view of the balance sheet or profitability metrics. However, capital expenditure was higher at US $20.7 million, up from $2.1 million in December. The increase was primarily due to activities to bring G2 and G4 wells online for Who Dat.

Cash fell from US $170.4 million to US $119.5 million. However, drawn debt was also paid down from US $274.1 million to US $249.0 million. Net debt increased from US $103.7 million to US $129.5 million. Debt is fully drawn, so available liquidity is the current cash position of US $119.5 million.

The cash position doesn’t raise alarm bells, given KAR’s low gearing. We’d like to see the group return to cash generation, but they will likely be able to raise capital if necessary.

On this front, KAR is seeking to add the Who Dat assets to its borrowing base for its debt facility. The lenders’ agreement could increase the current facility limit by a further US $90 million.

In the upcoming half-year update, we will be keen to see a full half-impact of Who Dat on the unit cost of production, which should fall with the addition of the more efficient assets.

Exploration

KAR is full of exciting developments. The announcement in early April that the company has approved an exploration program in Who Dat East and South is big news. The market showed renewed interest in the stock on the promise of further potential growth.

The cost of the two wells is expected to be US $66-77 million net to Karoon. Given the oil abundance in the region and their experienced JV partners, it looks like a smart play. Karoon needs to explore and find new productive assets while cash flows from Bauna and Who Dat.

Bauna’s potential 2028 end of life looms as a cash cow that needs to be replaced. It’s certainly achievable, and Neon and surrounding Brazil resources might do just that.

However, we have evidence of how productive wells in the Gulf of Mexico region can be. Who Dat is very low-cost, and the G2 and G4 wells promise to bring in more cash again.

Both wells are close enough to the existing Who Dat production facility that a potential tie-in could be viable, saving money on new production facilities.

Who Dat East is 27km from the Who Dat Floating Production System (FPS). Drilling will aim to test five main reservoir intervals. Estimated resources are 5.4 MMboe 2C and 10.7 MMboe 2U on a Net Revenue Interest(NRI) basis for Karoon. Total estimated resources for the JV are 17 MMboe 2C and 35 MMboe 2U.

Based on an independent expert evaluation, the estimated chance of success is 62%. Drilling will commence shortly and should take approximately 56 days. So, we should get an update sometime in June.

Who Dat South is only 11km from the Who Dat FPS. Drilling is expected to commence later in the quarter, and with an estimated 50 drilling days required, we are likely to get an update in mid-third quarter of 2024.

Drilling will test two targets, with one shallower target similar to the initial Who Dat G1 well. On an NRI basis, estimated resources for Karoon are 7.6 MMboe 2U. The total JV resource is estimated at 31 MMboe 2U.

Source: Karoon Exploration Announcement 3 April 2024

Outlook

KAR have downgraded their 2024 guidance.

Total production is expected to be within a range of 10.5-12.5 MMboe, down from a previous range of 11.2-13.5 MMboe. The main cause is the slower production rate seen out of Who Dat due to well performance, production bottlenecks, and oil over gas prioritisation.

Despite the downgrade, there are some positives to look forward to. If gas prices stabilise and head back higher, we expect the operator to reprioritise total flows over minimising gas production. This could lead to increased productivity on very short notice.

Historically, gas has spent little time at these low prices. Fitch Ratings is forecasting US $2.50/mcf for Henry Hub gas, compared to latest prices of US $1.76. Additionally, the forecast is for prices to rise to US $3.00/mcf for 2025.

Source: TradingView

The above chart shows front month Henry Hub Natural Gas futures prices (Nymex: NG1!).

The last time we had sustained trading at these prices was in the mid-90s. There have been occasional spikes down to these prices since then, but it isn’t a sustainable pricing level.

The Who Dat resource is a very low-cost asset. So, if the operator feels the heat enough to slow gas production, that will also happen in many other facilities.

In this way, it is reasonable to expect that the supply-demand dynamic will change eventually and that gas prices will return to stronger levels.

The other positive potentiality to watch for is the increased production volume from the G2 lower reservoir later in the year. While this won’t rescue the 2024 production rate, it could set the company up for a very strong 2025, which could start to be priced into the stock later in the year.

The company is also moving closer to a production decision on Neon, located near Bauna offshore of Brazil. Two potentially viable development paths have been selected for the concept select phase. The most likely pathway is a standalone development using a redeployed FPSO vessel, creating a potential production hub for nearby resources.

Further studies will now take place to understand each option better and explore the project’s two biggest challenges. The first is the possibility of a low actual resource, which could render the project unprofitable. The second is rising development and production costs.

KAR is aiming to complete these studies in early 2025. A green light would move the project into the detailed design phase, where execution timelines, project specifications and cost estimates will be defined. Neon West, located 2km from Neon, will also be evaluated as a potential drilling target for late 2025.

The Neon discovery contains 60 MMbbl of 2C contingent resources and more than 100MMbbl of prospective 2U resources.

Source: Karoon Energy March 2024 Quarterly Activities Report

KAR is covered by 14 analysts with an average price target of $2.65.

The consensus analyst revenue for the June 2024 quarter is US $246.2 million, which represents a ~25% increase from March. Given the annual guidance and the Bauna planned downtime, this is entirely achievable.

Production guidance for 2024 is 10.5-12.5 MMboe. This is a 15-37% increase from 9.13 MMboe in 2023. The boost comes despite a lengthy planned downtime for Bauna in Q3.

G2 and G4 coming online are a nice boost to the low cost Who Dat facility. The June quarter is tracking towards a 4.18% higher oil price than March.

Recommendation

KAR has great-quality oil assets in its portfolio. The looming possibility of Bauna’s production ending in 2028 has the market wary of the stock, but the recent GoM acquisition ensures long-term, high-quality, productive assets.

On the upside potential, there is a strong chance of an extension to Bauna. New G2 and G4 wells coming online promise a bump to production numbers. While there is still anticipated maintenance downtime for Bauna later in the year, the market is more certain about the impact now, and it looks very manageable.

The GoM acquisition is bigger than the producing assets, and an exploration program has been approved for Who Dat East and South. Karoon stands to make an increased share of any production from the new wells at 40%. Further regional production could come at the same lower end of the cost curve that the company is seeing from Who Dat.

The company’s balance sheet shows minimal debt and the ability to continue funding exploration and development activities.

Despite the looming spectre of a soft oil market, KAR is priced far below what could be considered a reasonable valuation. This pullback is an opportunity to get onto this recent upward momentum. Given the uncertainty around all prices in the longer term, we favour a medium-term holding period of 1-2 years.

Our recommendation is to ‘buy’ Karoon Energy (ASX: KAR) at current prices up to $2.15 and sell above $3.50.

Technical Update

The announcement of recent results dampened the strong bull run in the KAR share price. We’ve seen a sharp drop back into a buying range in the last week.

The next major support is $1.73. However, minor levels before that could hold up the price, particularly at $1.80. Given that the production issues represent delays to revenue more than a long-term problem, we are comfortable maintaining our buy up to the price of $2.15 and are happy to keep buying below that price.

We continue to expect volatility in the share price, as much of the value in KAR is tied to speculative future revenue tied to current exploration targets, such as Neon and Who Dat South and East. So, we expect the share price to fluctuate on any news flow related to exploration. Additionally, we’ve seen high volatility in both the natural gas and crude oil prices, which also creates uncertainty and speculation.

So, any investment in KAR should be sized appropriately, keeping this ongoing volatility in mind.

Source: TradingView / Shares in Value

 

 

1H24 Earnings Analysis – 6th March 2024

Karoon Energy (ASX: KAR) has released their full year results to December 2024. It was a transition year for the company in their reporting metrics. They’ve moved their full year end from June to December. So this annual report is for six months only. They are still referring to the 12 months ending June 2023 as FY23, and the six months ending December 2023 is being called TY23 (Transition Year).

We’ll try to keep the complexity to a minimum by just discussing the six month results, so keep in mind when reading this report that these are six month results and TY23 is a six month period.

The company has delivered an impressively strong result with revenue of US $412.9 million, and increase of 54.6% on 2HFY23. Sales volumes grew 38.9% to 5.07 MMboe. The weighted average net realised price also increased 11.6% to US $81.51/boe.

The trend of falling unit production costs continued with a 23% reduction to US $11.09/boe. Total production costs increased 25.1% to US $78.2 million.

We can see the economies of scale really kicking in for KAR. With increased sales volumes and realised prices coupled with decreased unit costs, the Underlying NPAT delivered an impressive 129.3% jump to US $144.7 million.

Source: Karoon Energy TY 2023 Annual Report

Cash and equivalents stood at US $170.4 million. Drawn debt totalled US $274 million from total debt facilities of US $340 million. Gearing stands at only 10%. Conservative gearing allows the company to pump more money into exploration and development, but also further acquisitions. We expect they’re already on the hunt for their next earnings accretive takeover or JV play.

Bauna Update

Bauna is located off the coast of Brazil and is the company’s main production asset. A recent intervention has increased FY23 production by 51%. Bauna is in natural decline and is expected to see flow reduced by about 15%. 2P reserves sit at 52 MMboe.

KAR is investigating options to extend Bauna past its 2028 end of life out to as far as 2038. The outcome of a decision to extend the life is contingent on the ability to secure longer operating leases.

Production was impacted in the December quarter by issues in the dehydration unit causing hydrates in two wells. While production is now back on track, a maintenance period later in April will impact 1H24 production. CY24 guidance has been downgraded to 7.2- 9.0 MMboe down from 8-10 MMboe.

Source: Karoon Energy TY 2023 Investor Presentation

As well as operating Bauna, Karoon is pursuing other exploration and development opportunities. The Neon discovery in Brazil contains 60 MMbbl of 2C contingent resources and more than 100MMbbl of prospective 2U resources. The company is considering various production options, including a standalone development and tiebacks between Bauna and Neon to consolidate production at one site.

The GoM Acquisition

In December, company completed the acquisition of a 30% stake in the GoM (Gulf of Mexico), which includes Who Dat and Dome Patrol oil fields. The deal adds instant scale to KAR with a boost of 57-63% to their CY24 production guidance, a 75% increase to 2P reserves, and 50% to 2C and 2U resources.

The GoM assets are low cost at just US$5.70 per barrel of oil operating cost. Once transport, processing and royalties are accounted for, current oil prices offer a 67% pre-tax margin on every barrel of oil sold.

The package adds to KAR’s existing strong exploration potential.

The new and bigger Karoon will become the second biggest oil producer on the ASX behind Woodside and in front of Santos. While this might look strange with KAR’s $1.4 billion market cap, compared to Santos at $24.6 billion, there’s a reason for the disconnect.

Santos has much bigger oil reserves.

While that might sound like a more attractive long-term play, there’s a high degree of uncertainty for the price of oil, particularly with the rise of EVs likely to have a substantial impact in the next few years.

While this uncertainty is more than priced into oil stocks now, the heavier short-term weighting of KAR makes them a much more attractive play, particularly with the much heavier discounting that the market is applying to them.

Outlook

There’s good reason to be excited about the outlook for Karoon Energy. The sales volumes were lower than production due to an in transit shipment. That lead to an increase in inventory of US$12.7 million which will be recognised as revenue in the second half.

There’s also only 11 days contribution from the new Who Dat acquisition.

On the Who Dat front, a development well intercepted a shallow reservoir which provides the possibility of a quick and easy boost to production within the operating capacity of the existing Who Dat infrastructure. Talk about good deal timing!

A decision on the CY24 drilling campaign is expected in the first half of 2024. Who Dat brings significant exploration potential on top of the impressive existing production.

Bauna production will be impacted in 1H24 by a two week planned maintenance shutdown in April. Natural decline at Bauna is expected to be more than offset by the additional production at Who Dat. Production guidance of 11.2-13.5 MMboe equates to a 2.4-23.4% increase on the TY23 full year run rate of 10.94 MMboe.

Karoon Energy TY2023 Results Investor Presentation

KAR is covered by 13 analysts with an average price target of $2.63. Analyst forecasts imply a 10% lift in revenue for the six months to June 2024 to AU $698.3/36 million.

While CY2024 production guidance is for an average increase of 12.9%, Nymex crude futures are on track to be 3.7% lower on average in this current six month period compared to the TY23 period. The analysts forecasts therefore look ballpark accurate based on information that is currently available.

Recommendation

KAR has some great quality oil assets in their portfolio. The looming possibility of a production end at Bauna in 2028 has the market wary of the stock. But the recent GoM acquisition ensures long-term high quality productive assets.

On the upside potential, there is a strong chance of an extension to Bauna, particularly with a tie-in arrangement with the new Neon reserves which should lower the unit production costs of both sites. The GoM acquisition is bigger than the producing assets. Exploration potential in the area is strong, and KAR gets a bigger stake in exploration assets. GoM also gives them a fantastic JV partner with proven expertise in the region. It’s no mistake that Who Dat has such fantastic economies.

On the balance sheet front the company is strong, with minimal debt and the ability to keep funding exploration and development activities.

Despite the looming spectre of a soft oil market, KAR is priced far below what could be considered a reasonable valuation. This pullback is an opportunity to get onto this recent upward momentum. Given the uncertainty around all prices in the longer term, we favour a medium-term holding period of 1-2 years.

Our recommendation is to ‘buy’ Karoon Energy (ASX: KAR) at current prices up to $2.15 and sell above $3.50.

Technical Update

The KAR share price experienced a sharp COVID capitulation in March 2020. This marked the end of a long-term downtrend after highs above $11 in 2009.

In the last few years, we’ve seen a return to a bull market, with prices moving strongly higher from the lows at 34 cents to a high of $2.72 in October 2023. The share price is now broadly following the price of crude oil.

Price has recently broken below an upward channel, creating some selling pressure. A recent pullback tested the blue horizontal support at $1.73, which we previously saw as an intermediate level, but is proving to be very strong. This gives confidence to buying above the level as long as the fundamental picture stays intact.

We now look set to re-test the resistance $2.41.

Source: TradingView / Shares in Value

 

 

Karoon Energy (ASX: KAR) – Initiation – High Conviction Buys – 21st January 2024

Who is Karoon Energy?

Karoon Energy (ASX: KAR) owns and operates the Bauna offshore oil field in Brazil. A recent intervention has increased FY23 production by 51%. CY24 guidance is for 8-10 Mmboe, with Bauna expected to experience a natural decline of about 15%. 2P reserves sit at 52 Mmboe. KAR is investigating options to extend Bauna past its 2028 end of life out to as far as 2038.

As well as operating Bauna, Karoon is pursuing other exploration and development opportunities. The Neon discovery in Brazil contains 60 Mmbbl of 2C contingent resources and more than 100MMbbl of prospective 2U resources. The company is considering various production options, including a standalone development and tiebacks between Bauna and Neon to consolidate production at one site.

The GoM Acquisition

The company has announced the acquisition of a 30% stake in the GoM (Gulf of Mexico), which includes Who Dat and Dome Patrol oil fields. The deal adds instant scale to KAR with a boost of 57-63% to their CY24 production guidance, a 75% increase to 2P reserves, and 50% to 2C and 2U resources.

The GoM assets are low cost at just US$5.70 per barrel of oil operating cost. Once transport, processing and royalties are accounted for, current oil prices offer a 67% pre-tax margin on every barrel of oil sold.

The package adds to KAR’s existing strong exploration potential.

The new and bigger Karoon will become the second biggest oil producer on the ASX behind Woodside and in front of Santos. While this might look strange with KAR’s $1.4 billion market cap, compared to Santos at $24.6 billion, there’s a reason for the disconnect.

Santos has much bigger oil reserves.

While that might sound like a more attractive long-term play, there’s a high degree of uncertainty for the price of oil, particularly with the rise of EVs likely to have a substantial impact in the next few years.

While this uncertainty is more than priced into oil stocks now, the heavier short-term weighting of KAR makes them a much more attractive play, particularly with the much heavier discounting that the market is applying to them.

How to play Karoon’s stock?

The KAR share price experienced a sharp COVID capitulation in March 2020. This marked the end of a long-term downtrend after highs above $11 in 2009.

In the last three years, we’ve seen a return to a bull market, with prices moving strongly higher from the lows at 34 cents to a high of $2.72 in October 2023. The share price is now broadly following the price of crude oil.

Price has recently broken below an upward channel, creating some selling pressure. Intermediate levels at $1.73 and $1.51 could put a floor under the price. The next substantial level is at $1.43.

Despite the looming spectre of a soft oil market, KAR is priced far below what could be considered a reasonable valuation. This pullback is an opportunity to get onto this recent upward momentum. Given the uncertainty around all prices in the longer term, we favour a medium-term holding period of 1-2 years.

Buy up to $2.15 and sell above $3.50.

Source: TradingView / Shares in Value

 

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