Could Karoon Energy ultimately be worth up to $8 a share?

Tue 20 Sep 22, 10:01am (AEST)
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Key Points

  • Intelligent Investor believes Karoon could lift production to 12mmbbl over the next few years
  • Morgans maintains an Add rating and $3.20 target price
  • Karoon is now guiding to a virtual doubling of production of between 7-9mmbbl Body

After increasing oil output to 4.63m barrels (mmbbl) last year from 3.14mmbbl in 2021, Karoon Energy is now guiding to a virtual doubling of production of between 7-9mmbbl, with four of the planned wells now having been completed.

At the full year FY22 the oil producer delivered reporting earnings of US$205m and net profit of US$90m, both ahead of Macquarie's estimates. 

However, despite higher production and higher prices, the oil producer still ended up reporting full year FY22 statutory net losses after tax of US$64.5m (versus statutory NPAT of US$4.4m in FY2021).

What happened?

At face value, this result doesn’t look grand.

But to put the statutory loss into context, the result includes paying Petrobras $227.1m more than expected when it bought the Brazilian giant’s Bauna field.

In layman’s terms, Karoon agreed to pay Petrobras a trailing commission based on the oil price.

Ipso facto, the higher the oil price, the greater the trailing commission will be.

In short, Karoon will be paying the maximum liability of US$285m over the next five years, which after factoring interest equates to a present value of around $300m.

As well as putting a major dent in last year’s profits, these commissions create something of any overhang on profitability for the foreseeable future.

Cash flow and revenue

However, it’s important to not to forget that while liability to Petrobras is going up so to are both cash flow and revenues.

Intelligent Investor reminds investors that it’s not inconceivable Karoon could lift production to 12mmbbl over the next few years.

Assuming prices of US$90 a barrel and costs (including depreciation) of US$40 a barrel, the fund manager can foresee pre-tax profits of around US$600m, everything going to plan.

Based on this scenario, and at normalised prices of US$70, the fund manager pegs pre-tax profits at around US$360m.

“For those who believe that oil prices will stay above $100/bbl due to nascent supply, Karoon’s growing output might ultimately be worth over $8 a share,” the fund manager notes.

“That outcome is a possibility rather than a base case.”


However, the fund manager warns investors for Karoon to deliver this sort of outcome, the business would have to complete production perfectly, and link new wells to existing infrastructure without a glitch.

Equally important, Intelligent Investor notes, the company would have to deftly manage cash flow and maintain balance sheet strong enough to whether potential oil price falls.

“We think Karoon now has the management in place to do this sensibly… that hasn’t been the case for the past decade," the fund manager notes.

What other brokers think?

Karoon’s share price is up 38% over one year.

Consensus on Karoon is Moderate Buy.

Based on Morningstar’s fair value of $2.70 the stock appears to be undervalued.

Based on the three brokers that cover Karoon (as reported on by FN Arena) the stock is currently trading with 31.4% upside to the target price of $2.66.

While FY23 production guidance showed some slippage, Morgans notes production cost guidance was well below the broker’s forecast, demonstrating that the majority of opex at Bauna is fixed.

The broker maintains its Add rating and expects the share price to re-rate towards its unchanged $3.20 target price.

With the company continuing to guide to an initial 5-10,000 barrels per day increase at Bauna, with completion expected in the fourth quarter, Macquarie retains an Outperform rating and target price of $2.55.

Karoon Energy share price over 12 months.


Written By

Mark Story


Mark is an investigative financial journalist and editor who started his career working for Marathon Oil in London. He has a degree in politics/economics and a diploma in journalism. Mark has worked on 70-plus newspapers and financial publications across Australia, NZ, the US, and Asia including: The Australian Financial Review, Money Magazine, Australian Property Investor and Finance Asia. Mark is passionate about improving the financial literacy of all Australians through the highest quality content. 

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