Company Overview: Karoon Energy Ltd (ASX: KAR) is an international oil and gas exploration and production company with a high-quality portfolio of exploration assets. The company’s assets include the Neon and Goiá oil discoveries, exploration block S-M-1537 (‘Clorita’), and the Baúna field. KAR was listed on the Australian Securities Exchange (ASX) on 8th June 2004. KAR is focused on creating shareholder value by applying its geographical and geotechnical expertise to identify valuable early-stage acreage, and then leveraging high equity interests to explore and appraise new opportunities.

KAR Details

Progressing Near-term Growth Projects to Increase Production: The 100% acquisition of Baúna oil field (including the undeveloped Patola discovery) in H1FY21 has significantly improved the KAR’s position as a major oil producer on ASX. With a broad pipeline of development projects, the company is now progressing to transform into a global energy company.

• Improving Production Performance: During the June 2021 quarter, the company delivered a solid production performance, with increased oil output from the Baúna field. Currently, the company is focused on the development of its two near-term growth projects - Baúna field and Patola field. It is expected that the Baúna interventions and Patola development will substantially improve the company’s production level by early 2023.
• Strategic Focus: The strategy of Karoon Energy Ltd is focused on delivering sustainable growth through production from existing assets, realising value by developing existing discoveries and delivering future growth through focused exploration.

H1FY21 Result Highlights:

• Improved Top line: For H1FY21, the company reported total revenue of A$32.9 million and a gross profit of A$9.325 million. In H1FY20, the company had reported nil revenue and gross profit.
• Improved Bottom Line: Overall net loss after income tax stood at A$2.39 million for the half-year, improved from the loss of A$24.63 million in H1FY20, mainly due to the income tax benefit of A$52 million.

Improved Net loss (Source: Analysis by Kalkine Group)

June 2021 Quarter Highlights:

• Improved Oil Production: During the June 2021 quarter, the company’s total oil production from the Baúna Field in the Santos Basin stood at 1.19 million barrels (mmbbl), up 4% on the previous quarter.
• Increase in Oil Sales Revenue: Oil sales revenue for Q4FY21 stood at US$95.7 million, up by 87% on the previous quarter, driven by the improved oil prices. This took the total FY21 oil sales revenue to US$170.8 million.
• Cash and Debt Scenario: As at 30 June 2021, the company had cash and cash equivalents of US$133.2 million, up 1% on the previous quarter. At the end of the June 2021 quarter, the company had no external debt.

Latest Developments:

• Change in Substantial Holding: Yarra Management Nominees Pty Ltd, one of the substantial holders of Karoon Energy Ltd, has increased its holding in the company from 5.4% to 6.082%.
• Appointment of New Executive Vice President: The company has recently announced the appointment of Mr. Antonio Guimarães as Executive Vice President & President of Karoon Brazil, effective from 1 October 2021.

Key Risks: Gross margin and EBITDA margin for H1FY21 stood at 28.3% and -3.9%, respectively. For H1FY21, the company’s accounts receivable ratio stood at 1.2x, up from nil ratio in H1FY20. Current ratio for H1FY21 stood 2.14x, down from 14.21x in H1FY20, but up from the industry median of 1.06x. 

Liquidity Profile (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 32.23% of the total shareholding, while the top four constitutes the maximum holding. Nikko Asset Management Australia Limited and L1 Capital Pty Ltd. are holding a maximum stake in the company at 6.08% and 5.63%, respectively, as also highlighted in the chart below:

(Source: Analysis by Kalkine Group)

Key Risks:

• Fluctuations in the Prices of Oil: KAR is also exposed to the risk associated with fluctuation in oil a price as it could impact the company’s financial performance.
• COVID-19 Uncertainties: The COVID-19 pandemic could cause delay and disrupt the company’s operations.

Outlook:  The recent acquisition of the Baúna asset provides a sustainable production base to expand production and invest in new opportunities. KAR continues to evaluate exploration and development opportunities, focussed on Brazil, Peru, and Australia. The company’s near-term growth projects (Baúna field and Patola field) are expected to more than double production by early 2023.  In FY21, the company expects its unit operating cost to be in the range of US$24–26/bbl. The company expects its FY21 results to be released on 23 September 2021.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last one month, the stock has corrected by 5.6% and is currently trading higher than the average 52-week price level band of $0.685 - $1.490. We have valued the stock using a EV/Sales multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). The company can trade at a slight premium to its peers, considering the improved production performance in June quarter, expected benefits from the growth projects, and modest outlook. For the purpose of valuation, few peers Santos Ltd (ASX: STO), Viva Energy Group Ltd (ASX: VEA), etc. are taken. Considering the company’s decent June 2021 quarter performance, improving top and bottom line, expected increase in production from the near-term growth projects, valuation, and key risks associated with the business (as stated above), we give a “Speculative Buy” rating on the stock at the current market price of $1.255 as on 11 August 2021, 12:25 PM (GMT+10), Sydney, Eastern Australia.

KAR Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined: 

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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