Karoon gets nod for reduced royalty rate at Baúna: Share price up 7%

Having been on an upward trajectory all week on the back of rising oil prices, up a whopping 9% since Monday, Karon Energy (ASX: KAR) received an added kicker this morning following revelations that royalties paid to Brazilian authorities will fall.

The mid-tier Brazilian oil-play’s share price was up 7.25% in afternoon trade, to around a six-month high, following a decision by the board of the Brazilian government oil and gas regulator, the Brazilian National Agency for Petroleum, Natural Gas and Biofuels (ANP) to:

• Approved Karoon’s updated Baúna Area development plan.

• Reduce the royalty rate on the incremental production from the BMS-40 license.

How the royalties work

Once formalised, the decision to reduce the royalty rate will apply to all incremental production from the Baúna, Piracaba and Patola fields resulting from the investments in the Baúna interventions and the Patola development when compared to the previously anticipated base production profile without these investments.

For the base production profile, the historical 10% royalty rate will continue to apply.

The royalty to be applied will be at a rate of 7.5% for the incremental production up to 50% higher than the base production profile and 5% for any incremental production more than 50% above the base production profile.

Revitalise Baúna

Karoon’s CEO Julian Fowles reminded investors that ANP’s decision to reduce royalty rates on numerous late-life fields onshore and offshore Brazil, encourages the ongoing development of mature oil and gas fields.

“We are delighted that ANP has recognised the major investment that Karoon is making to revitalise the Baúna field,” Fowles noted.

“The successful Baúna field intervention campaign and the Patola development, which is currently underway, are aimed at doubling production from the field… The incremental revenues generated from this major investment will benefit all stakeholders.”

Is M&A action pending?

Today’s news around royalties follows recent speculation that the company could soon be looking for support for an M&A deal and an associated funding package.

Those reading the tea leaves emanating from Fowles recent visits to the UK and Brazil, where he hosted investors and analysts at its oil wells, suggest the company could be eyeballing “value accretive acquisitions”.

Fowles previously revealed that the company could potentially invest in Australian oil fields to diversify its operations.

New Brazil developments

However, given that Karoon is according to the Evercore report, eyeing new developments offshore Brazil, this appears less likely.

In addition to prospects in Brazil, including the Baúna offshore oilfield, which it acquired for US$665m from national oil company Petrobras in 2019, Karoon will soon begin development drilling at the Patola Field.

Management is expected to make a final investment decision on its Neon shallow-water field in 2023.

With cash and cash equivalents at 30 June 2022 of US$157.7m, US$30m of drawn debt and remaining undrawn debt facility of US$180m, Karoon’s balance sheet looks reasonably placed to embark on future M&A activity.

What brokers think

Karoon’s share price is up 40% over the past 12 months.

Consensus on Karoon is Moderate Buy.

Based on Morningstar’s fair value of $2.52 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 27.3% upside to the target price of $2.82.

While Macquarie believes the pursuit of a second oil asset remains a challenge for Karoon, the company remains a top ASX Energy pick for the broker.

The broker retains an Outperform rating and the target price increases to $2.90 from $2.55. 

Due to relative uncertainty and risk-adjusted valuation, Karoon is among stocks least preferred by Morgan Stanley.

The broker’s price target falls to $1.98 from $2.25 and the Equal-weight rating is unchanged.

Karoon Energy share price over 12 months.