Company Overview - Karoon Gas Australia Ltd is an independent oil and gas company. The Company is engaged in investing in hydrocarbon exploration and evaluation in Australia, Brazil and Peru. Its segments are Australia, Brazil and Peru. The Australia segment includes exploration and evaluation of hydrocarbons in two offshore permit areas: WA-314-P, which is located in Browse Basin, and WA-482-P, which is located in Carnarvon Basin. The Brazil segment includes exploration and evaluation of hydrocarbons in five offshore blocks: Block S-M-1037, Block S-M-1101, Block S-M-1102, Block S-M-1165 and Block S-M-1166, which are located in Santos Basin with gross acreage of over 550 square kilometers. These blocks are located approximately 200 kilometers from the coastline of Santa Catarina. The Peru segment includes exploration and evaluation of hydrocarbons in two blocks: Block 144 (onshore), which is located in Maranon Basin, and Block Z-38 (offshore), which is located in Tumbes Basin.
 

KAR Details

Focusing on acquisition of production and development assets: Karoon Gas Australia Limited remains committed to its acquisition strategy and capitalising on current market conditions to acquire assets that are consistent with the company’s exploration led growth strategy. During Q3FY17, Karoon continued to conduct due diligence reviews on number of potential acquisition opportunities. In Q2FY17, Karoon had confirmed the award of the right to negotiate a final agreement with Petroleo Brasileiro S.A. (Petrobras), subject to conducting confirmatory due diligence, on the potential sale of an interest in the Bauna and Tartaruga Verde oil fields. However, after that, court proceedings were initiated against the potential sale of the assets, alleging that Petrobras did not follow the correct sale process and an injunction was granted by suspending the potential sale. While the company’s acquisition strategy suffered a setback during the quarter following the withdrawal of the sales process for the Bauna and Tartaruga Verde oil projects, it remains committed to participating in any future process relating to these assets. Further, Petrobras has advised Karoon that it intends to reinitiate a sales process for Bauna and Tartaruga Verde in accordance with Petrobras’ revised divestment process methodology, which has been updated to comply with the new Brazilian Federal Court of Accounts requirements. Reinitiating a sales process under Petrobras’ revised methodology is expected to reduce the risk of any future court action against a potential sale and provide greater certainty for the successful bidder. The group is considering offloading their assets as a part of their divestment target to achieve over US$35 billion of assets between 2015?2018, and decrease their debt.

Operations review: During Q3FY17, detailed geological, geophysical, reservoir modelling and production scenario work continued with focus on optimising the Echidna development concept to reflect the most favourable economic outcome. As a result of on-going subsurface analysis and optimisation work on the development concept, the Echidna appraisal drilling campaign previously expected to commence during calendar year 2017 has been postponed and the Olinda Star semi?submersible drilling rig will be released pending the negotiation of final commercial terms. During the quarter, Karoon’s purchase of Pacific’s 35% interest in the Santos Basin Blocks was approved by the Agencia Nacional do Petroleo, Gas Natural e Biocombustiveis, and resulted in a payment to Pacific of $20 million for the interest.


Echidna Appraisal Well Locations; (Source: Company reports)
 
To attain 2D marine seismic data: Karoon’s initial 3?year firm commitment term consists of the acquisition of 2D and 3D marine seismic surveys, geological and geophysical studies in Australia. Further, the company is currently considering options with respect to obtaining 2D marine seismic data during the 2017/2018 summer months. At Carnarvon basin, the joint operation has high quality 3D data covering over 75% of the permit area. Currently, seismic interpretation, hydrocarbon charge modelling and amplitude versus offset (AVO) analyses are being conducted to better define risk and rank identified prospects and leads and expected to be completed during H2FY17.


Exploration Australia: Carnarvon Basin; (Source: Company reports)

Reprocessing of the acquired Kraken 3D marine seismic was ongoing during the quarter, while it was expected to provide better definition of plays identified, and with the support of AVO/Quantitative Inversion analysis, to allow re?risking of the Elvie prospect. Previous G&G studies, in addition to the Kraken 3D marine seismic survey interpretation and thermal maturation modelling, provide supporting evidence for potentially oil prone hydrocarbon systems being active in the permit area. At Peru, while the block remains in force majeure, advanced geophysical studies continued during the quarter and the results of seismic attribute and AVO analysis continue to be encouraging. They show a distinction between water, oil and gas signatures in reservoirs in a number of prospects in the 1,500 square kilometre 3D seismic area. These results, along with 3D marine seismic data and sea floor drop cores, enhance the case for the presence of an active hydrocarbon system in the block, while drilling preparations are ongoing.


Mapping and Seismic Attributes; (Source: Company reports)

Exploration permit for EPP46: In Q2FY17, the group got the exploration permit for Ceduna Sub-Basin, EPP46, which is the core prospective and active frontier oil exploration province. The group expects A$26 million which includes 2D and 3D seismic acquisition for a three-year firm commitment. The preliminary geological studies are underway, while 2D seismic acquisition is proposed during the first half of 2018. Given the group’s track record of high standards, they expect to minimize the impact on the environment and local fishing industry in the area. Meanwhile, the group is clearing the way forward for Echidna Appraisal Campaign in the Santos Basin. Further, the group is planning two-well Echidna appraisal campaign in this year to leverage the lower utilization rates and volatile cost environment. The group expects that further discoveries at Kangaroo and Bilby would offer possible tie back opportunities.


Australia: Ceduna Basin, EPP46; (Source: Company reports)

H1FY17 net loss decreased due to other income: The consolidated result of the group for the financial half-year was a loss after tax income of $8,347,501 (2015: $83,954,943). The loss for the financial half-year included the write-off of the carrying amount of non-current capitalised exploration and evaluation expenditure associated with Block 144 of $6,809,685 (2015: historical Australian exploration and evaluation activities that are no longer continuing and/or considered prospective of $149,620,842) and net employee benefits expenses stood at $5,629,551 (2015: $5,814,946). H1FY17 included exploration and evaluation expenditure of $590,678 (2015: $709,974) from reviewing new exploration ventures predominately in Australia and Brazil. Notably, gains from other items have partially offsetting the loss for H1FY17, such as net foreign currency gains of $10,727,748 (2015: $25,977,428); interest income of $482,854 (2015: $1,083,459) and tax income of $530,707 (2015: $46,171,978). The net foreign currency gains were almost entirely attributable to the appreciation in the United States dollar against the Australian dollar (from AUD1:USD0.7426 as at 30 June 2016 to AUD1:USD0.7236 as at 31 December 2016) on cash assets and security deposits held in United States dollars by the group during the financial half-year.

Recommendation: KAR stock has fallen 25.7% in the last three months (as of June 21, 2017), due to hurdles from the Federal Court of Sergipe regarding KAR’s 100% operated interest in concession BM?S?40, the Bauna oil project, and a 50% non?operated interest in concession BM?C?36, the Tartaruga Verde oil development project from Petrobras. Despite this issue, the group’s Echidna discovered oil resource appraisal and promises a potential development opportunity and to leverage the falling development costs environment, the group believes on a full field development without using an Early Production System. KAR is aiming at a peak production of over ~30kbopd from Echidna. Moreover, the group is focusing on exploration opportunities at highly prospective acreage with multi-year tenure and its intention to relinquish Block 144. We give a “Buy” recommendation on the stock at the current market price of $ 1.360


KAR Daily chart; (Source: Thomson Reuters)
 

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