Karoon Energy: Moves while asset window is still open

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
01 April 2022, 8:30 AM
Sectors Covered:
Mining, Energy

  • Karoon Energy (ASX:KAR) has entered into a period of exclusivity regarding the potential acquisition of a 50% stake in the Atlanta field.
  • Consistent with KAR’s inorganic strategy, Atlanta is an existing oil field in Brazil (~14kbopd) with growth options (~40kbopd expansion plus 1.3bn bbl OIP).
  • The Atlanta field produces heavy oil (14°API) and is receiving Brent parity.
  • Too soon to form a view with a deal not yet finalised. But the right kind of move from the savvy high-margin oil producer. We maintain our Add rating.

KAR enters exclusivity period on Atlanta field

KAR has entered discussions with Brazilian oil & gas producer Enauta Participações SA over the potential acquisition of a 50% non-operated interest in the Atlanta oil field. Like the Bauna field, Atlanta is also located in the Santos Basin.

So far conditional, non-binding and incomplete. An exclusivity agreement (until 31 May) has been signed, allowing KAR to carry out due diligence and negotiate.

Atlanta has existing oil production of ~14kbpd (100%), from a 3-well initial development of the field. Although larger growth is planned for Atlanta, with its 1.3 billion barrels of oil in place.

On growth, Enauta recently achieved FID on expanding Atlanta to a 6-well ~40kbopd operation possibly from 2024. A new (larger) FPSO has already been secured from Yinson, with work to refurbish it already underway.

Enauta has set an initial estimate of US$1.2bn capex (100%) for the expansion, which includes the new FPSO.

Analysis

The potential deal is consistent with management guidance, with KAR focusing on inorganic opportunities within Brazil. Staying in Brazil allows KAR to tap its existing inhouse capabilities while effectively managing its assets in close relative proximity. 

If comparable deals are any guide, we expect KAR to pay consideration based on Atlanta’s existing developed 2P reserves (~104mmbbl), and then contribute its share of growth capex. While oil markets are higher, we still see some small potential for a portion of consideration to be contingent (deferred).

With net cash of US$176m and liquidity of US$334m (Dec 21), while we also expect healthy FCF generation has continued in 2H22. If a deal is finalised, KAR’s capable balance sheet will help it on funding. While we also expect KAR moving to be a producer with multiple operating fields will boost its appeal amongst lenders.

We expect the Atlanta acquisition and full-field development will receive solid support from debt markets. While growth of production from Bauna will also upsize KAR earnings and help it fund the additional growth at Atlanta.

KAR has always maintained that any inorganic growth would need to be supported by attractive value accretion. We expect the key levers in negotiations will focus on consideration KAR is willing to pay vs the return profile for Atlanta’s growth (Enauta’s assumptions vs inflationary pressures vs execution risk).

Investment view

Excited by the news, but it is also important to highlight that so far discussions are non-binding and incomplete. We await further updates post due diligence.

While the value of any deal will depend on the outcome of negotiations we expect it will be hard for the deal not to be well received given the immediate ~50% group production growth and earnings accretion against a backdrop of robust oil prices.

No changes to estimates. We maintain our Add rating and (login to view) target price.

Price catalysts

  • Outcome of negotiations on Atlanta field.
  • Bauna’s underlying operational performance in 3Q22.
  • Intervention program at Bauna and Patola development.

Risks

  • COVID-19 risk to operations and end markets.
  • Execution risk on Bauna growth.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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